shariah resolutions english

SHARIAH RESOLUTIONS

IN ISLAMIC FINANCEwww.bnm.gov.my

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Soft Cover Shariah Eng.pdf 8/18/11 5:09:54 PM

ii

First Edition

Published 2007

Second Edition

Published 2010

www.bnm.gov.my

October 2010

© Bank Negara Malaysia, 2010. All rights reserved.

Foreword by Governor of Bank Negara Malaysia xi

Foreword by Chairman of Shariah Advisory Council of Bank Negara Malaysia xiii

Shariah Advisory Council of Bank Negara Malaysia xv

Members of the Shariah Advisory Council ofBank Negara Malaysia (1997 – 2010) xvi

Introduction xviii

PART 1: SHARIAH CONTRACTS

IJARAH 3

1. Application of al-Ijarah thumma al-Bai` in Vehicle Financing

2. Assignment of Liabilities in al-Ijarah thumma al-Bai`

3. Ownership Status of Ijarah Asset

4. Termination of Ijarah Contract

5. Issuance of Bank Negara Negotiable Notes Based on Ijarah Concept

6. Ijarah Contract with Floating Rental Rate

7. Absorption of Costs Associated with Ownership of Asset in Ijarah

8. Liability of Lessee over Third Party’s Asset

9. Lessee’s Priority to Purchase Asset in the Event of Default in Rental Payment

10. Surplus Sharing from Sale of Ijarah Asset between Lessor and Lessee

11. Utilisation of Third Party’s Asset Acquired Through Mudarabah Contract as

Underlying Asset in Issuance of Sukuk Ijarah

12. Application of Ijarah Mawsufah fi al-Zimmah Concept in Financing for House

under Construction Based on Musyarakah Mutanaqisah

13. Deposit Payment in Islamic Hire Purchase

14. Utilisation of Third Party’s Asset Acquired Through Sale Concept in Issuance

of Sukuk Ijarah

CONTENTS

iii

iv

ISTISNA` 21

15. Project Financing Based on Istisna` with Pledging of Conventional Bond

MUDARABAH 24

16. Islamic Negotiable Instrument of Deposit Based on Mudarabah

17. Application of Mudarabah Contract in Current Account Product

18. Mudarabah Investment Certificate as Security

19. Profit Equalisation Reserve

20. Administrative Costs in Mudarabah Deposit Account

21. Intra-Day Transaction as an Islamic Money Market Instrument

22. Indirect Expenses

23. Assignment of Weightage

24. Practice of Islamic Financial Institutions in Transferring Mudarabah Investment

Profit to Customer to Avoid Displaced Commercial Risk

25. Third Party Guarantee on Liability of a Mudarib’s Counterparty in Mudarabah

Transaction

26. Mudarib’s Guarantee on Liability of His Counterparty in Mudarabah Joint

Venture

27. Capital Contribution by Mudarib in Mudarabah Joint Venture

28. Third Party Guarantee for Capital and/or Profit in Mudarabah Transaction

MUSYARAKAH 40

29. Financing Products Based on Musyarakah

30. Financing Based on Musyarakah Mutanaqisah

31. Application of Wa`d as a Mechanism in Dealing with Customer’s Default in

Financing Based on Musyarakah Mutanaqisah

QARD 47

32. Qard Principles in Islamic Finance

33. Liquidity Management Instrument Based on Qard

34. Combination of Advance Profit Payment Based on Qard and Murabahah

Contract

RAHN 53

35. Two Financing Facilities Secured by an Asset

36. Dealing with a Charged Asset

37. Conventional Fixed Deposit Certificate as Security in Islamic Financing

38. Islamic Debt Securities as Collateralised Asset

39. Sale of Collateralised Asset in the Event of Default by Financing Receiver to

Pay the Financing Amount to Financier

40. Profit Accrued from Collateralised Asset Throughout Charge Tenure

TAKAFUL 62

41. Takaful Model Based on Tabarru` and Wakalah

42. Application of Musahamah Concept in Commercial General Takaful Plan

43. Retakaful Business Model Based on Wakalah - Wakaf

44. Takaful Coverage for Islamic Financing

45. Takaful Coverage for Conventional Loans

46. Takaful Coverage for Conventional Credit Card Product

47. Retakaful with Conventional Insurance and Reinsurance Company

48. Retakaful Service Fee as Income for Shareholders Fund

49. Co-Takaful Agreement

50. Segregation of Takaful Funds

51. Imposition of Management Fee on Takaful Participants’ Contribution

52. Distribution of Surplus from Participants’ Risk Fund

53. Distribution of Investment Profit from Participants’ Investment Fund and

Participants’ Risk Fund

54. Provision of Reserve in Takaful Business

55. Mechanism to Overcome Deficit in Participants’ Risk Fund

56. Hibah in Takaful

57. Nomination Based on Hibah under Takaful Scheme

58. Principle of Utmost Good Faith in Takaful

59. “Insurable Interest” in Takaful

v

TAWARRUQ 94

60. Deposit Product Based on Tawarruq

61. Financing Product Based on Tawarruq

62. Sukuk Ijarah and Shariah Compliant Shares as Underlying Asset in Tawarruq

Transaction

63. Application of Tawarruq in Sukuk Commodity Murabahah

64. Proposed Operational Model of Commodity Murabahah House (Now Known

as Suq al-Sila`)

WADIÀH 101

65. Adaptation (Takyif) of Wadiàh Yad Dhamanah as Qard

WAKALAH 103

66. Application of Wakalah bi al-Istithmar in Deposit Product

BAI` DAYN 106

67. Repurchase of Negotiable Islamic Debt Certificate

68. Sale of Debt Arising from Services

BAI` ÌNAH 109

69. Application of Bai` Ìnah in Issuance of Negotiable Islamic Debt Certificate

70. Application of Bai` Ìnah in Islamic Interbank Money Market

71. Application of “Sale and Buy Back” Contract

72. Conditions for Validity of Bai` Ìnah Contract

73. Stipulation to Repurchase Asset in Bai` Ìnah Contract

vi

PART II: SUPPORTING SHARIAH CONCEPTS

HIBAH 117

74. Hibah in Interbank Mudarabah Investment Contract

75. Application of Hibah in the Contract of al-Ijarah thumma al-Bai`

76. Hibah in Wadiàh Contract

77. Hibah in Qard Contract

IBRA’ 123

78. Ibra’ in Islamic Financing

79. Two Forms of Ibra’ in a Financing Agreement

80. Ibra’ in Home Financing Product Linked to a Wadiàh or Mudarabah Deposit

Account

TA`WIDH AND GHARAMAH 129

81. Imposition of Ta`widh and Gharamah in Islamic Financing Facilities

82. Imposition of Compensation on a Customer who Makes Early Settlement

83. Method of Late Payment Charge on Judgment Debt

PART III: ISLAMIC FINANCIAL PRODUCTS

FINANCIAL DERIVATIVE INSTRUMENTS 137

84. Spot and Forward Foreign Currency Exchange Transactions

85. Islamic Profit Rate Swap Based on Bai` Ìnah

86. Forward Foreign Currency Exchange Transaction Based on Bai` Mu’ajjal

87. Foreign Currency Option Based on Hamish Jiddiyyah, Wa`d and Tawarruq

88. Foreign Currency Option Based on Wa`d and Two Independent Tawarruq

Transactions

vii

ISLAMIC CREDIT CARD 148

89. Islamic Credit Card Based on Bai` Ìnah and Wadiàh

90. Islamic Credit Card Based on the Concept of Ujrah

91. Takaful Cover for Islamic Credit Cardholders

92. Cash Back Rebate on Credit Card Annual Fee

93. Islamic Credit Card Based on the Concepts of Wakalah and Kafalah

HYBRID PRODUCTS 155

94. Current Account Product Based on Wadiàh Yad Dhamanah and Mudarabah

Contracts

95. Deposit Product Based on Mudarabah and Qard Contracts

96. Deposit Product Based on Wadiàh and Mudarabah Contracts

97. Financing Product for House under Construction Based on Istisna` Muwazi,

Ijarah Mawsufah fi al-Zimmah and Ijarah Muntahia bi al-Tamlik

SUKUK BASED ON BAI` BITHAMAN AJIL (BBA) 160

98. Mudarabah Interbank Investment as Underlying Asset in a Deferred Payment

Sale

99. The Existence of Underlying Asset Throughout the Sukuk Maturity Tenure

100. Bidding Methods for the Sukuk BBA

PART IV: SHARIAH ISSUES IN RELATION TO THE OPERATIONS OFSUPPORTING INSTITUTIONS IN ISLAMIC FINANCE

CREDIT GUARANTEE CORPORATION (M) BERHAD 165

101. Shariah Concept for the Operation of Islamic Guarantee Facility by Credit

Guarantee Corporation

102. Guarantee on the Sale Price

viii

DANAJAMIN NASIONAL BERHAD 168

103. Shariah Concept for the Operation of Guarantee Facility by Danajamin

Nasional Berhad

104. Capital Segregation in the Operation of Danajamin

105. Scope of Danajamin’s Guarantee on Sukuk

106. Guarantee on the Obligation Arising from Purchase Undertaking

107. Late Payment and Additional Recourse Charge

108. Ownership of Underlying Asset in Sukuk Based on Ijarah Contract

MALAYSIA DEPOSIT INSURANCE CORPORATION 175

109. Shariah Concept for the Operation of Islamic Deposit Insurance

110. Commingling of Funds Contributed by Islamic and Conventional Banking

Institutions in Deposit Insurance

111. Guarantee Limit for Islamic Banking Deposits by PIDM

112. Definition of Term “Deposit” in Islamic Deposit Insurance

113. Status of PIDM’s Claim Against Depositors’ Claim in the Event of Winding

up of an Islamic Banking Institution

114. Application of Muqasah in Islamic Deposit Insurance

NATIONAL MORTGAGE CORPORATION (CAGAMAS) 182

115. Mortgage Guarantee Facility

PART V: SHARIAH ISSUES IN ISLAMIC FINANCE

WINDING UP OF ISLAMIC BANKING INSTITUTIONS 187

116. Priority of Depositors in Recovering Deposit in the Event of Winding Up of

an Islamic Banking Institution

117. Surplus Sharing Post Liquidation and Payment of Claims between Islamic

and Conventional Banking Funds

118. Status of Conventional Fund Placed in Mudarabah Special Investment

Account in the Event of Winding Up of Banking Institutions

ix

x

ACCOUNTING AND REPORTING STANDARDS IN ISLAMIC FINANCE 190

119. Method for Profit Distribution

120. Method for Revenue Recognition

121. Application of “Substance over Form” Principle in Islamic Finance

122. Application of Probability Principle

123. Application of Time Value of Money Principle

OTHER MATTERS 197

124. Deposit or Customer’s Investment Fund from Doubtful Sources

125. Financing to a Party Who Explicitly Performs Non-Shariah Compliant

Activities

126. Application of Conventional Overdrafts to Cover Insufficiency in Wadi`ah

Current Account

127. Commitment Fee on Unutilised Balance of Islamic Overdraft Facility or

Revolving Credit

128. Islamic Financial Instrument as Underlying Asset in Conventional Transaction

129. Financial Market Instruments as Underlying Asset in Deferred Transaction

130. Mechanism in Determining the Amount of Settlement Price in Financial Market

131. Restructuring and Rescheduling in Islamic Financing Agreement

132. Bidding Concept by Principal Dealer in Islamic Money Market

133. Financing Settlement Through New Financing

134. Undetermined Sale Price in Sale and Purchase Agreement

135. Underlying Concept for Islamic Block Discounting Transaction

GLOSSARY 215

xi

Bismillahirrahmanirrahim,

The successful publication of this book, the second edition of Bank NegaraMalaysia’s Shariah Resolutions in Islamic Finance documents Shariah rulings madeby Bank Negara Malaysia’s Shariah Advisory Council (SAC). It aims to be an essential guide and reference point for the Islamic financial community.

This recent decade has been a defining era in the development of Islamic finance.This period, marked by the increased internationalisation and sustained global expansion, Islamic finance has continued to evolve as an increasingly importantcomponent of the global financial system. It has facilitated greater cross-borderfinancial flows. This is particularly evident with the increased dynamism of sukukin the international Islamic financial markets. There are also increased global efforts to improve Shariah governance in Islamic financial institutions within therespective different jurisdictions. Whilst Islamic finance demonstrated resilienceduring the recent global financial crisis, continuous efforts are being taken to further strengthen the international financial infrastructure and regulatory oversight in Islamic finance to ensure that it remains effective and competitive intoday’s more challenging international financial environment.

In tandem with the widening international outreach, there has been a steady increase in product innovation and market breakthroughs in Islamic finance. Theproduct range has now expanded into an extensive spectrum of retail financingand sophisticated financial products such as private equity, project finance, theorigination and issuance of sukuk and in wealth management products. The dynamism of Shariah has been an important driving force in contributing to theaccelerated pace of innovation in Islamic finance. The pursuit to meet the growingand differentiated demand of the global community for Islamic financial solutionshas now expanded beyond the traditional contracts such as murabahah,musyarakah and mudarabah, to other innovative Shariah structures and hybridconcepts such as wakalah bi al-istithmar and musyarakah mutanaqisah. This attests to the ability of Shariah scholars and advisors to harness the wisdom ofShariah to facilitate the structuring of product features that are competitive andinnovative. This has contributed to the rapid development of contemporary Islamicfinancial products and services.

FOREWORD BY GOVERNOR OFBANK NEGARA MALAYSIA

xii

As the highest authority in the ascertainment of Shariah in Islamic finance, the SAChas a pivotal role in ensuring the credibility and integrity of Shariah rulings. In itscapacity as a centralised referral body for Islamic finance communities, the SAC upholds the objectives (maqasid) of Shariah and preserves its sanctity through resolutions which are subjected to robust deliberation and rigorous consultativeprocesses, thereby contributing immensely to the effectiveness of Shariah governance framework in Malaysia. This second edition of the SAC resolutions,which is a compilation of all the Shariah resolutions made between 1997 and 2009,is a continuation of the earlier efforts to deepen the understanding on the Shariahinterpretations and the juristic reasoning for the rulings. Together with the ongoinginitiative to develop the Shariah Parameter References, the SAC Resolutions publication series is part of the commitment by Bank Negara Malaysia towards thedevelopment of the industry. It aims to increase the level of transparency on juristicreasoning in Islamic finance and thus an increased appreciation and acceptance ofShariah decisions. It would also allow for more efficient Shariah governance at institutional level, whilst catalysing greater cross-border harmonisation in the interpretation and application of Shariah.

Finally, I wish to thank all those who have been involved in the publication of thisbook, particularly the SAC members, whose collective wisdom, wealth of experience and tireless dedication have been a pivotal contribution to the development and advancement of Islamic finance.

Dr. Zeti Akhtar AzizGovernorBank Negara Malaysia

Assalamualaikum Warahmatullahi Wabarakatuh,

All Praise to Allah SWT and Prayers to His Messenger, Prophet Muhammad SAW,his family, companions and followers.

Bank Negara Malaysia has always been at the forefront of the country’s noblepursuit in providing dynamic and cutting-edge support to the Islamic finance industry. In tandem with the burgeoning interest in Islamic finance worldwidethat attracts a growing number of Muslims and non-Muslims alike, Bank NegaraMalaysia has taken significant measures to encourage the proliferation of knowledge and understanding in Islamic finance in order to meet the increasingdemand within the industry. One such effort, with Allah’s SWT Blessings, is thepublication of this second edition of Bank Negara Malaysia’s Shariah Resolutionsin Islamic Finance.

This book is a scholarly compilation of the resolutions which emanated from thevarious meetings of the Shariah Advisory Council of Bank Negara Malaysia overthe years from 1997 - 2009. It is envisaged that this book will contribute towardsenriching the corpus of knowledge on the subject of Islamic finance and will berelied upon by the industry as a basis for product development and product enhancement.

This fatwa-based compilation is regarded as a manifestation of the collective Ijtihad of a council of scholars who are responsible to advise Bank Negara Malaysiaon Shariah matters relating to Islamic finance. The collective Ijtihad is a new phenomenon in Islamic law since the 20th century, which is more evident in theIslamic finance industry through the practices of the Shariah advisory services.The compilation of fatwas or resolutions is made more relevant in a jurisdictionsuch as Malaysia, whereby the resolutions of the Shariah Advisory Council of BankNegara Malaysia are binding on all Islamic financial institutions, takaful companies,courts and arbitrators. The value of this compilation can be appreciated when theresolutions are analysed within the framework of Islamic juristic arguments andIslamic philosophy of Ijtihad, in particular the collective Ijtihad.

FOREWORD BY CHAIRMAN OF SHARIAH ADVISORY COUNCIL OF BANK NEGARA MALAYSIA

xiii

I am hopeful that this compilation will serve the purposes for which it is published.

Wassalam.

Dr. Mohd Daud BakarChairmanShariah Advisory Council of Bank Negara Malaysia2006 – 2010

xiv

The Shariah Advisory Council of Bank Negara Malaysia (SAC) was established in1997 as the highest authoritative body in ascertainment of Shariah matters relating to Islamic finance in Malaysia. The SAC has been given the mandate toascertain the Islamic law for the purposes of Islamic banking business, takafulbusiness, Islamic financial business, Islamic development financial business, or anyother businesses, that are based on Shariah principles and are supervised and regulated by Bank Negara Malaysia. As the reference body and advisor to BankNegara Malaysia on Shariah matters, the SAC is also responsible for validating allIslamic banking and takaful products to ensure their compatibility with Shariahprinciples. In addition, the SAC advises Bank Negara Malaysia on any Shariah issues pertaining to Islamic financial business or transactions of Bank NegaraMalaysia, as well as other related entities.

In the recent provisions of the Central Bank of Malaysia Act 2009, the roles andfunctions of the SAC have been further reinforced whereby the SAC is accordedthe status as the sole authoritative body on Shariah matters pertaining to Islamicbanking, takaful and Islamic finance in Malaysia. While the rulings of SAC are applicable to Islamic financial institutions, the courts and arbitrator are also required to refer to the rulings of the SAC for any proceedings relating to Islamicfinancial business, and such rulings shall be binding.

The SAC comprises prominent scholars and Islamic finance experts, whom arequalified individuals with vast experience and knowledge in various fields, especially in finance and Islamic law.

SHARIAH ADVISORY COUNCIL OFBANK NEGARA MALAYSIA

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xvi

MEMBERS OF THE SHARIAH ADVISORY COUNCIL OFBANK NEGARA MALAYSIA (1997 - 2010)

Dr. Mohd Daud Bakar Sessions of Appointment: 1997 - 2010

Dato’ Dr. Abdul Halim Ismail Sessions of Appointment: 1997 - 2010

Tun Abdul Hamid Mohamad Sessions of Appointment: 2004 - 2010

Tan Sri Datuk Sheikh Ghazali Abdul Rahman Sessions of Appointment: 1999 - 2010

Datuk Haji Md. Hashim YahayaSessions of Appointment: 1997 - 2010

Sahibus Samahah Dato’ Haji Hassan AhmadSessions of Appointment: 1997 - 2010

Dato’ Wan Mohamad Dato’ Sheikh Abd Aziz Sessions of Appointment: 2008 - 2010

Prof. Madya Dr. Engku Rabiah Adawiah Engku Ali Sessions of Appointment: 2006 - 2010

Prof. Madya Dr. Mohamad Akram Laldin Sessions of Appointment: 2008 - 2010

Dr. Muhammad Syafii Antonio Sessions of Appointment: 2006 - 2010

Prof. Madya Dr. Abdul Halim MuhammadSessions of Appointment: 2004 - 2008

xvii

Dr. Mohd Parid Sheikh AhmadSessions of Appointment: 2004 - 2008

Dr. Aznan HasanSessions of Appointment: 2006 - 2008

Prof. Datuk Dr. Abdul Monir YaacobSessions of Appointment: 1999 - 2006

Dr. Mohd Ali BaharumSessions of Appointment: 2001 - 2006

Prof. Dr. Joni Tamkin BorhanSessions of Appointment: 1999 - 2003

Prof. Dato’ Dr. Haji Othman IshakSessions of Appointment: 1997 - 1999

Dato’ Dr. Haron DinSessions of Appointment: 1997 - 1999

Dr. Ahmed Ali AbdallaSessions of Appointment: 1997 - 1999

Allahyarham Prof. Emeritus Tan Sri Datuk Ahmad IbrahimSessions of Appointment: 1997 - 1999

Allahyarham Dato’ Sheikh Azmi AhmadSessions of Appointment: 1997 - 1999

Allahyarham Dr. Abdullah IbrahimSessions of Appointment: 1997 - 1999

The Central Bank of Malaysia Act 2009 (the Act) has recognised the Shariah Advisory Council of Bank Negara Malaysia (SAC) as the highest authoritative bodyin ascertainment of matters relating to Shariah issues in Islamic finance. In this regard, Bank Negara Malaysia had published Shariah Resolutions in Islamic Finance(Second Edition) to serve as an important Shariah reference for Islamic finance industry practitioners, courts and arbitrators. This is in line with the requirement ofthe Act that requires all financial institutions, courts and arbitrators to refer to theSAC on any matters or proceedings relating to Islamic financial business.

This book contains the decisions of the SAC since its establishment in 1997 to 2009.It has been revised and endorsed by the SAC as the latest edition and applicable asreference on Shariah rulings relating to Islamic finance. This edition supersedes theShariah Resolutions in Islamic Finance (First Edition) which was published in 2007and the Summary of National Shariah Advisory Council Decisions for Islamic Banking and Takaful (Summary of SAC Decisions) which was released in 2002. Accordingly, all new Islamic financial products that will be offered by Islamic financial institutions or any existing products to be offered to new customers mustcomply with the rulings of this Shariah Resolutions in Islamic Finance (Second Edition). However, for Islamic financial products which have been contracted between the customers and Islamic financial institutions based on the Shariah rulings published in the First Edition and the Summary of SAC Decisions, the contracts remain in force until maturity.

In the event where there are any inconsistencies between the English and BahasaMelayu versions, the Bahasa Melayu version shall prevail.

Any queries relating to Shariah Resolutions in Islamic Finance (Second Edition)maybe submitted to the SAC Secretariat via e-mail: [email protected]

INTRODUCTIONxviii

xix

ABBREVIATIONS

AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions

AITAB Al-ijarah thumma al-bai`

BBA Bai` bithaman ajil

BNNN-Ijarah Bank Negara Negotiable Notes based on theconcept of ijarah

Cagamas National Mortgage Corporation

CGC Credit Guarantee Corporation (Malaysia)Berhad

CMH Commodity Murabahah House

CPO Crude palm oil

Danajamin Danajamin Nasional Berhad

FAST Fully Automated System for Issuing/Tendering

IBS Islamic Banking Scheme

INID Islamic Negotiable Instrument of Deposit

IT Information technology

MII Mudarabah Interbank Investment

NIDC Negotiable Islamic Debt Certificate

n.d. No date

no. Number

xx

OIC Organisation of the Islamic Conference

p. Page

PIDM Perbadanan Insurans Deposit Malaysia (Malaysia Deposit Insurance Corporation)

PER Profit Equalisation Reserve

‘r’ Rate of return of financial institutions

RENTAS Real Time Electronic Transfer of Funds and Securities

SAC Shariah Advisory Council of Bank NegaraMalaysia

SAW Sallallahu `alaihi wasallam

SPV Special Purpose Vehicle

SWT Subhanahu wa ta`ala

T+2 Two days after the transaction date

v. Volume

1SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

PART 1: SHARIAH CONTRACTS

Ijarah refers to a lease or commission contract that involves an exchange ofusufruct or benefits of an asset or a service for rent or commission for an agreedperiod. In the context of Islamic finance, the ijarah concept is usually applicablein financing contracts such as in real property financing, vehicle financing, projectfinancing and personal financing. There are also financing products that enablecustomers to lease assets from Islamic financial institutions with an option to acquire the leased assets at the end of the lease tenure based on the concept ofijarah muntahia bi al-tamlik or al-ijarah thumma al-bai`.

1. Application of al-Ijarah thumma al-Bai` in Vehicle Financing

There has been a proposal by an Islamic financial institution to introduce vehiclefinancing based on al-ijarah thumma al-bai` (AITAB) concept. The financing basedon AITAB involves two types of contracts, namely leasing contract (ijarah), followed by sale contract (al-bai`).

At the initial stage, the Islamic financial institution will conclude an ijarah agreement with the customer. Under this agreement, the Islamic financial institution will appoint the customer as an agent to purchase the vehicle identifiedby the customer. Subsequently, the Islamic financial institution will lease the vehicle to the customer for a specified period.

Upon expiry of the lease period, the customer has the option to purchase the vehicle from the Islamic financial institution. If the customer opts to purchase thevehicle, the Islamic financial institution and the customer will conclude a sale contract and the ownership of the vehicle will be transferred from the Islamic financial institution to the customer.

In this regard, the SAC was referred to on the issue as to whether the applicationof AITAB in the aforesaid vehicle financing is allowed by the Shariah.

Resolution

The SAC, in its first meeting dated 8 July 1997 and 36th meeting dated 26June 2003, has resolved that the application of the AITAB concept in vehicle financing is permissible, subject to the following conditions:

IJARAH 3SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE


i. The modus operandi of AITAB shall consist of two independent contracts,namely ijarah contract and al-bai` contract;

ii. The sale price upon expiry of the lease period may be equivalent to thelast rental amount of ijarah;

iii. An agency letter to appoint the customer as an agent for the Islamic financial institution shall be introduced in the modus operandi of AITAB;

iv. The AITAB agreement shall include a clause that specifies “will purchasethe vehicle” at the end of the lease period, as well as a clause on earlyredemption by the lessee;

v. The deposit paid to the vehicle dealer does not form a sale contract sinceit is deemed as a deposit that has to be paid by the Islamic financial institution;

vi. In line with the principles of ijarah, the Islamic financial institution as theowner of the asset shall bear all reasonable risks relating to the ownership; and

vii. For cases relating to refinancing with a new financier, the lessee shallfirstly terminate the existing AITAB contract before entering into a newAITAB agreement.

Basis of the Ruling

The aforesaid SAC’s resolution has considered the following:

i. The option to execute a sale contract at the end of the lease tenure is a featureof AITAB and ijarah muntahia bi al-tamlik that is permissible and practised inthe market. This option does not contradict the Shariah as the ijarah contractand the sale contract are executed independently;1 and

ii. The OIC Fiqh Academy, in its resolution no. 110 (12/4), has also allowed ijarahmuntahia bi al-tamlik, subject to certain conditions.2

1 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Standard no. 9 (Al-Ijarah wa al-Ijarah al-Muntahia bi al-Tamlik), paragraph 2/2.2 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 2000, no. 12, v. 1, p. 697 - 698.


2. Assignment of Liabilities in al-Ijarah thumma al-Bai`

Most vehicle financing facilities offered by Islamic financial institutions are basedon al-ijarah thumma al-bai` (AITAB) concept. However, there are circumstanceswhereby the lessee decides to discontinue the lease and seeks to find anotherperson as a replacement who will continue the lease and will ultimately purchasethe asset from the Islamic financial institution. This arrangement is in line withthe provision of the Hire Purchase Act 1967 that allows a lessee to transfer hisrights and liabilities under a hire purchase agreement to another person.

In this regard, the SAC was referred to on the issue as to whether the concept ofassignment of liabilities as provided under the Hire Purchase Act 1967 is applicablein vehicle financing based on AITAB.

Resolution

The SAC, in its 7th meeting dated 29 October 1998, has resolved that vehicle financing based on AITAB may apply the concept of assignment ofliabilities as provided under the Hire Purchase Act 1967.

Basis of the Ruling

The assignment of rights or liabilities does not contradict the Shariah as Islamrecognises transfer of rights and liabilities based on mutual agreement by the parties. In the context of vehicle financing based on AITAB, if a lessee decides todiscontinue the lease, he may transfer his rights and liabilities to another partywho will continue the lease and will ultimately purchase the asset from the Islamicfinancial institution.


3. Ownership Status of Ijarah Asset

In an ijarah contract, the lessor is the owner of the ijarah asset whereas the lesseeis only entitled to the usufruct of the asset. Since in the current practice the lessor’sname is not registered in the asset’s title, the SAC was referred to on the issue asto whether the lessor possesses the ownership of the leased asset.

Resolution

The SAC, in its 29th meeting dated 25 September 2002, has resolved thatthe lessor is the owner of the leased asset although his name is not registeredin the asset’s title.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the Shariah recognition of both legalownership and beneficial ownership.3 In the context of ijarah, the lessor has thebeneficial ownership although the asset is not registered under his name. Such beneficial ownership may be proven through the documentation of the ijarahagreement concluded between the lessor and the lessee.

4. Termination of Ijarah Contract

Termination of a contract is allowed in Shariah whenever the contracting partiesdecide to discontinue the mutually agreed contract. Termination of a contract mayoccur due to various reasons, which include among others, to avoid injustice, lossesor any other harm to the contracting parties. In this regard, the SAC was referredto on the basis for termination of an ijarah contract.

3 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1990, no. 6, v. 1, p. 771.


Resolution

The SAC, in its 29th meeting dated 25 September 2002, has resolved thatan ijarah contract may be terminated if the leased asset does not functionand loses its usufruct, the contracting parties do not fulfill the terms andconditions of the contract or both contracting parties mutually agree to terminate the contract.

Basis of the Ruling


i. The subject matter of an ijarah contract is the usufruct of the leased asset andif the asset loses its usufruct, the ijarah contract may be terminated.4

ii. Based on the principle of freedom to contract, both contracting parties arefree to stipulate any mutually agreed contractual terms and conditions. Therefore, the ijarah contract may be terminated if any of the contracting parties does not satisfy the agreed terms and conditions. This is in line withthe following hadith of Rasulullah SAW:

4 Al-Syatibi, Al-Muwafaqat fi Usul al-Syari`ah, Dar al-Ma`rifah, 1999, v. 3, p. 165; Ibnu Qudamah, Al-Mughni, Dar`Alam al-Kutub, 1997, v. 8, p. 125.

5 Ibnu Majah, Sunan Ibnu Majah, Dar al-Fikr, (n.d.), v. 2, p. 737, hadith no. 2185.6 Abu Daud, Sunan Abi Daud, Bait al-Afkar al-Dawliyyah, 1999, p. 398, hadith no. 3594.

“Verily, the contract of sale is based on mutual consent.”5

“The Muslims are bound by their (agreed) conditions except the condition thatpermits what is forbidden or forbids what is permissible.” 6

iii. The ijarah contract is a binding contract that requires mutual agreement ofboth parties for its termination.


5. Issuance of Bank Negara Negotiable Notes Based on Ijarah Concept

Bank Negara Malaysia proposed to issue Bank Negara Negotiable Notes based onijarah concept (BNNN-Ijarah). The proposed structure of the BNNN-Ijarah is as follows:

i. Bank Negara Malaysia will sell the beneficial interests of its real property (suchas land and building) to a Special Purpose Vehicle (SPV). The SPV will then leasethe property to Bank Negara Malaysia for a specific period through executionof an ijarah muntahia bi al-tamlik agreement. As a consideration, Bank NegaraMalaysia will pay rent (at a rate which is agreed during the conclusion of thecontract) for every 6 months throughout the lease period;

ii. Bank Negara Malaysia will provide to the SPV wa`d to repurchase the propertyat an agreed price on the maturity date;

iii. The SPV will then create a trust for the property and subsequently issue BNNN-Ijarah for subscription by market participants. Investors who subscribe to BNNN-Ijarah will make the purchase payment to the SPV and the proceeds will beutilised by the SPV for the settlement of the property’s purchase price to BankNegara Malaysia. Subsequent to this transaction, the market participants as investors now become the owners of the trust created by the SPV. As the owners, they are entitled to the rent paid by Bank Negara Malaysia; and

iv. Since the BNNN-Ijarah represents beneficial ownership on pro-rated basis of theproperty, the BNNN-Ijarah holders are able to sell the notes to the market at parprice, at discounted price or at premium.

In this regard, the SAC was referred to on the issue as to whether the proposed issuance of Bank Negara Negotiable Notes which is based on ijarah is permissibleby the Shariah.


Resolution

The SAC, in its 33rd meeting dated 27 March 2003, has resolved that theproposed structure of Bank Negara Negotiable Notes based on ijarah concept is permissible provided that there are two separate contracts executed at different times, whereby a sale contract is made subsequent toan ijarah contract, or there is an undertaking to acquire ownership (al-wa`dbi al-tamlik) through sale or hibah at the maturity of the leasing contract.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the considerations as mentioned initem 1.7

6. Ijarah Contract with Floating Rental Rate

At the initial stage of the development of Islamic finance, most of Islamic financingfacilities were offered at fixed rates with long maturity periods. With such features,Islamic financial institutions were tied to low profit rates, therefore limiting theirabilities to provide satisfactory returns to the investors. In addressing this issue, acommittee had been set up to study feasible financing models with floating orflexible rates that would facilitate the Islamic financial institutions to manage theirassets and liabilities more efficiently and offer competitive returns to the customers. Among the identified financing models that may adopt the floatingrate mechanism is financing that is based on ijarah contract.

In this regard, the SAC was referred to on the issue as to whether the floatingrate financing may be applied in ijarah contract.

7 Application of al-Ijarah thumma al-Bai` in Vehicle Financing.


Resolution

The SAC, in its 33rd meeting dated 27 March 2003, the 35th meeting dated22 May 2003 and the 38th meeting dated 28 August 2003, has resolved thatthe rate of rental in ijarah contract may vary based on an upfront agreementto base it against a mutually agreed variable for a specified period.

Basis of the Ruling

In an ijarah contract, the rate of rental of an asset is negotiable between the lessorand the lessee. It can be a fixed rate for the whole tenure until maturity or a flexiblerate that varies according to a certain method. In order to avoid any element ofgharar (uncertainty), an agreed method must be determined and described uponconcluding the contract. Subsequently, both contracting parties are bound by theterms until the maturity date of the contract. Any changes to the agreed floatingrate shall be deemed as the risk willingly taken by both parties based on an upfrontmutual agreement.

In addition, the rate of rental must be known by both contracting parties.8 The determination of the rate may be made for the whole lease period or in stages.The rate may also be fixed or floating depending on its suitability as acknowledgedby both lessee and lessor.9

7. Absorption of Costs Associated with Ownership of Asset in Ijarah

Generally, an Islamic financial institution as the lessor and the owner of the ijarahasset is responsible to bear the maintenance costs of the asset particularly the costsrelated to its ownership, such as quit rent and assessment fee. In addition, any lossdue to damage to the ijarah asset shall be borne by the Islamic financial institution.Therefore, the ijarah asset is usually covered by a takaful scheme in order to mitigatethe financial risk that may occur in the event of impairment of the ijarah asset.

8 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 9 (Al-Ijarah wa al-Ijarah al-Muntahia bi al-Tamlik), paragraph 5/2/1.9 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 9 (Al-Ijarah wa al-Ijarah al-Muntahia bi al-Tamlik), paragraph 5/2/1.


In this regard, the SAC was referred to on the issue as to whether the owner ofthe ijarah asset may transfer the obligation to bear the costs of maintenance andtakaful coverage to the lessee, namely the customer.

Resolution

The SAC, in its 29th meeting dated 25 September 2002, the 36th meetingdated 26 June 2003 and the 104th meeting dated 26th August 2010, hasresolved that the owner of the asset is not allowed to transfer the obligation to bear the costs of maintenance and takaful coverage of theleased asset to the lessee. However, the owner may appoint the lessee ashis agent to bear those costs which will be offset in the sale transaction ofthe asset at the end of the lease period.

Basis of the Ruling


i. The lessor is responsible to bear the costs of maintenance and takaful coverageof the leased asset, if any.10 The quit rent, for instance, is a type of maintenancecost that relates to the ownership of the asset, and therefore it must be borneby the lessor. However, the lessee is allowed to pay for the quit rent and takafulcoverage cost on behalf of the lessor, and the amount of such payment shallbe deemed as part of the deposit and will be offset (muqasah) in the saletransaction at the end of the lease period; and

ii. Although there are differences in terms of type, feature and tenure of debts,the mutually agreed offsetting of debts (al-muqasah al-ittifaqiyyah) is permissible, since consent is considered as a mutual agreement (ittifaqiyyah)of the debtor and the creditor to any extra amount of their debt towards eachother (if any).11

10 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 9 (Al-Ijarah wa al-Ijarah al-Muntahia bi al-Tamlik), paragraph 5/1/7.11 AAOIFI, Al-Maàyir al-Syarìyyah,Standard no. 4 (Al-Muqasah), paragraph 2/2/3.


8. Liability of Lessee over Third Party’s Asset

Essentially, all risks related to the ownership of the asset such as accident or damageto a third party’s asset due to negligence of the owner of the asset is borne by theowner. However, in the context of ijarah, an issue arises as to whether the Islamic financial institution (as the owner of the ijarah asset) is liable for any damage to athird party’s asset due to negligence of the lessee (or the customer). For example,if an accident happened due to negligence of the lessee and caused damage to athird party’s vehicle and also the leased vehicle via ijarah contract, should the Islamic financial institution as the owner of the ijarah asset be liable for losses suffered bythe third party?

In this regard, the SAC was referred to on the issue as to whether the Islamic financial institution is allowed to request for an indemnity letter from the customerthat indicates the customer’s guarantee to indemnify a third party, either in theform of cash, repair or replacement, in cases where accident or damage occur dueto the customer’s negligence.

Resolution

The SAC, in its 36th meeting dated 26 June 2003, has resolved that the Islamic financial institution is allowed to request for an indemnity letter fromthe customer for the purpose of ensuring that the customer in his capacityas a lessee provides a guarantee to indemnify a third party, either in cash,repair or replacement, if the occurrence of an accident or damage to thethird party’s asset is caused by his negligence.

Basis of the Ruling

The liability to a third party that relates to the ownership of the asset, such as anaccident or damage, is supposed to be borne by the owner of the asset. However,the owner may transfer such liability to the lessee if the third party’s claim is causedby the lessee’s negligence.


9. Lessee’s Priority to Purchase Asset in the Event of Default inRental Payment

In a financing contract based on ijarah muntahia bi al-tamlik or al-ijarah thummaal-bai`, there is a possibility that the lessee may default in settling the rental payment of the ijarah asset. As the financier and owner of the asset, the Islamicfinancial institution may suffer losses due to such default. Based on the terms ofthe contract, the Islamic financial institution as the owner of the asset shall makean offer to sell the asset to the customer if the customer fails to settle the rentalpayment within a specified period. If the customer refuses or cannot afford tobuy the asset, the Islamic financial institution shall sell it in the market in order torecover its capital and costs incurred.

In this regard, the SAC was referred to on the issue as to whether a defaultedcustomer may be given the priority to purchase the leased asset before it is offeredto the market, and whether a clause regarding such priority can be included inthe agreement.

Resolution

The SAC, in its 38th meeting dated 28 August 2003, has resolved that thecustomer who has defaulted in paying the rent may be given the priorityto purchase the leased asset before it is sold in the market, and such prioritymay be included in the terms of the agreement.

Basis of the Ruling

The aforesaid SAC’s resolution has considered that the main objective of the lessee in entering the ijarah muntahia bi al-tamlik or al-ijarah thumma al-bai` contract is to own the asset upon maturity of the financing period. Therefore, thecustomer should be given the priority to buy the asset before it is offered to themarket based on the agreed terms of ijarah contract. This practice is not contradictory to the objectives of ijarah contract (muqtada al-`aqd).


10. Surplus Sharing from Sale of Ijarah Asset between Lessor and Lessee

In the event a customer defaults in rental payment and is unable to purchase theasset in an ijarah muntahia bi al-tamlik or al-ijarah thumma al-bai` financing facility,the Islamic financial institution as the financier will normally sell the leased asset tothe market to recover its capital and costs incurred.

In this regard, the SAC was referred to on the issue as to whether any surplus (whichis the sale price that exceeds the amount claimed by the Islamic financial institution)gained from the sale of the leased asset will solely belong to the Islamic financialinstitution or it must be shared between the Islamic financial institution and thecustomer.

Resolution

The SAC, in its 38th meeting dated 28 August 2003, has resolved that the Islamic financial institution as the lessor is not obliged to share the surpluswith the customer as the asset is wholly owned by the lessor. However, thelessor may, at his discretion, give the surplus wholly or partially to the customer based on hibah.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the principle that the asset owner in anijarah contract has full right over the leased asset. Therefore, if the asset is sold tothe other party, the whole sale price belongs to the asset owner. As such, it is notobligatory on the owner to give the whole or part of his rights to others withouthis consent. In addition, the sale or auction of the leased asset in the market is dueto the lessee’s default in rental payment which should have been made in accordance with the terms and conditions of the contract.


11. Utilisation of Third Party’s Asset Acquired Through MudarabahContract as Underlying Asset in Issuance of Sukuk Ijarah

There was a proposal to issue sukuk ijarah that utilises a third party’s asset that isacquired through a mudarabah contract. Under this mechanism, entity A servesas a mudarib who receives the mudarabah capital in kind from the third party.Entity A subsequently sells the asset to a Special Purpose Vehicle (SPV) and laterleases back the asset from the SPV with rent payable twice a year. The SPV thenissues sukuk ijarah and makes coupon payments twice a year payable to the investors using the rental proceeds received from entity A.

Upon maturity, entity A has an option to purchase the asset from the SPV andsubsequently returns it to the original owner with an agreed profit rate. The mudarabah profit is determined based on cost saving derived from the issuanceof sukuk ijarah.

In this regard, the SAC was referred to on the issue as to whether the proposedissuance of sukuk ijarah that utilises a third party’s asset acquired through a mudarabah contract as an underlying asset is permissible.

Resolution

The SAC, in its 67th meeting dated 3 May 2007, has resolved that the proposed issuance of sukuk ijarah that utilises a third party’s asset acquiredthrough a mudarabah contract is not allowed. This is because the methodused for determining the mudarabah profit that is based on cost savingderived from the issuance of sukuk ijarah is not consistent with the principles of mudarabah profit as recognised by the scholars.


Basis of the Ruling

The definition of mudarabah profit as recognised by the scholars, such as IbnuQudamah, refers to the “added value” to the invested capital,12 and the amountof mudarabah profit may be determined by the pre-agreed profit sharing ratio atthe inception of the contract. With regard to the proposed issuance of sukuk ijarahthat utilises a third party’s asset, the mudarabah profit which is determined basedon the “cost saving” derived from issuance of the sukuk ijarah is not considered asan addition to the capital contributed by the investors.

12. Application of Ijarah Mawsufah fi al-Zimmah Concept in Financingfor House under Construction Based on Musyarakah Mutanaqisah

There has been a proposal by an Islamic financial institution for the application ofijarah mawsufah fi al-zimmah concept as a supporting contract in musyarakah mutanaqisah-based financing for houses that are still under construction. In this financing product, the customer and the Islamic financial institution share the rightsover the asset under construction based on musyarakah mutanaqisah contract. TheIslamic financial institution then leases its portion to the customer under the contract of ijarah mawsufah fi al-zimmah as the leased asset is still under construction. The customer pays advanced rent during the construction period ofthe asset. Upon completion of the asset, the customer will continue to pay full rentfor enjoyment of the usufruct of the asset.

In this regard, the SAC was referred to on the issue as to whether the applicationof ijarah mawsufah fi al-zimmah concept as a supporting contract in home financing product based on musyarakah mutanaqisah is permissible.

Resolution

The SAC, in its 68th meeting dated 24 May 2007, has resolved that the application of ijarah mawsufah fi al-zimmah in financing for house underconstruction using musyarakah mutanaqisah contract is permissible.

12 Ibnu Qudamah, Al-Mughni, Dar `Alam al-Kutub,1997, v. 7, p. 165.


Basis of the Ruling

The aforesaid SAC’s resolution has considered the following juristic views:

i. Al-Khatib Al-Sharbiniy in his book of Mughni al-Muhtaj, Al-Nawawi in his bookof Raudah al-Talibin and Al-Juzairi in his book of Kitab al-Fiqh àla al-Mazahibal-Arbaàh classified ijarah into two types:

a. Ijarah over the usufruct of a readily available asset; or

b. Ijarah over the usufruct of an asset undertaken to be made available(zimmah) such as leasing of an animal which is yet to be in existence for aspecified purpose, or a liability to construct a specified asset.

ii. According to schools of Maliki and Syafii, property/asset that may be leasedare divided into two, namely lease of usufruct of a readily available asset andlease of usufruct of an asset undertaken to be made available;13 and

iii. Ijarah mawsufah fi al-zimmah is permissible based on qiyas to salam contract.However, unlike salam contract, it is not a requirement to have the advancedrental payment while the asset is still under construction.14

13. Deposit Payment in Islamic Hire Purchase

As provided under the Hire Purchase Act 1967, the owner of the leased asset isrequired to take at least 10% of the cash value of the asset as a minimum deposit.In the current practice, the customer normally pays the rental deposit of the leasedasset or vehicle to the dealer. However, there are some instances whereby the deposit is required to be paid directly to the Islamic financial institution as the financier.

In this regard, the SAC was referred to on the possible best approach for the payment of deposit in Islamic hire purchase and the relationship between thedealer, customer and Islamic financial institution in the hire purchase agreement.

13 Ministry of Waqf and Islamic Affairs of Kuwait, Al-Mawsuàh al-Fiqhiyyah al-Kuwaitiyyah, 2004, v. 1, p. 259.14 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 9 (Al-Ijarah wa al-Ijarah al-Muntahia bi al-Tamlik), paragraph 3/5.

Resolution

The SAC, in its 69th meeting dated 27 July 2007, has resolved that the bestapproaches for the payment of deposit in Islamic hire purchase are as follows:

i. The customer pays the rental deposit (for example 10%) to the Islamicfinancial institution. The Islamic financial institution then purchases theasset or vehicle from the dealer by paying its total price (10% customer’sdeposit + balance of 90%). The Islamic financial institution later leasesthe asset or vehicle to the customer.

ii. However, if the customer has paid a certain amount (10%) to the dealer,the following two approaches are acceptable:

a. The deposit payment may be considered as a security deposit (hamishjiddiyyah). In this situation, the customer may have an arrangementwith the Islamic financial institution to offset the security deposit withthe asset’s selling price or rent; or

b. The deposit payment may be considered as a rental deposit (`urbun forijarah) to the dealer. When the asset is sold to the Islamic financial institution, the dealer will surrender the ownership of the asset and thelease agreement to the Islamic financial institution. In this situation, thedealer may have an arrangement with the Islamic financial institutionto offset the rental deposit with the selling price paid by the Islamic financial institution.

SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE18


“Hadith from Zaid bin Aslam narrated that Rasulullah SAW was asked by someoneon a ruling pertaining to the practice of ùrbun in sales and Rasulullah SAW allowed it.”16

“Narrated by Nafi` bin Abdul Haris: He bought a prison building for Umar fromSofwan bin Umayyah at four thousand dirham, if Umar agrees, then the sale isenforceable, if he disagrees, Sofwan is entitled to four hundred dirham.”17

14. Utilisation of Third Party’s Asset Acquired Through Sale Conceptin Issuance of Sukuk Ijarah

There was a proposal to issue sukuk ijarah that utilises a third party’s asset whichis acquired through a sale concept. Under this mechanism, entity A buys a thirdparty’s asset and later sells it to a Special Purpose Vehicle (SPV). This transactioninvolves transfer of ownership from entity A to the SPV. The SPV subsequently issues sukuk ijarah to an Islamic financial institution that represents a pro rataownership amongst the sukuk holders over the asset. The SPV receives proceedsfrom the issuance of the sukuk whereby part of the proceeds is utilised to paythe asset’s purchase price to entity A.

15 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 8 (Al-Murabahah li al-Amir bi al-Syira’), paragraph 2/5/3.16 Al-Syawkani, Nail al-Awtar, Dar al-Kutub al-Ìlmiyyah, 1999, v. 5, p. 162.17 Ibnu Qudamah, Al-Mughni, Dar Àlam al-Kutub, 1997, v. 6, p. 331.

Basis of the Ruling

The payment of a security deposit which is known as hamish jiddiyah may be applicable in the context of deposit for Islamic hire purchase since it has beenrecognised by the contemporary scholars as a method in Islamic financial products.15

With regard to the deposit payment which may be considered as a rental deposit(ùrbun for ijarah), there are some narrations on the permissibility of ùrbun asfollows:

Subsequently, the SPV leases the asset to entity A based on ijarah muntahia bi al-tamlik concept. As a consideration, entity A pays rents to the SPV twice a year andthe rents are distributed amongst the sukuk ijarah holders. Entity A repurchases theasset from the SPV at a price that is equivalent to the nominal value of the sukukijarah at the maturity date. The SPV then redeems the sukuk ijarah from the investors.

In this regard, the SAC was referred to on the issue as to whether the issuance ofthe sukuk ijarah that utilises a third party’s asset acquired through a sale conceptis allowed by the Shariah.

Resolution

The SAC, in its 70th meeting dated 12 September 2007, has resolved that theproposed structure of sukuk ijarah that utilises a third party’s asset acquiredthrough a sale concept is permissible.

Basis of the Ruling

The aforesaid SAC’s resolution has considered that the sale and purchase contractin this sukuk ijarah structure is clear and valid provided it satisfies all conditions ofa sale contract such as transfer of ownership etc. Besides, the application of ijarahmuntahia bi al-tamlik contract or also known as al-ijarah thumma al-bai` is acceptedby majority of the fuqaha’ (please refer to item 118).

18 Application of al-Ijarah thumma al-Bai` in Vehicle Financing.


ISTISNA`

Istisna` is a contract of sale and purchase involving manufacturing, producing orconstructing a particular asset according to certain terms and specifications asagreed between the seller, the manufacturer/developer and the customer. In thecurrent context, istisna` is normally applied in the construction and manufacturingsectors, for example, through parallel istisna` (istisna` muwazi), to finance construction and manufacturing activities.

15. Project Financing Based on Istisna` with Pledging of ConventionalBond

An Islamic financial institution decided to offer project financing based on istisna`contract to renovate and refurbish its customer’s business premise. The proposedmodus operandi for this istisna` financing is as follows:

i. The customer awards a contract to renovate his business premise to the Islamicfinancial institution at a price, for example, RM2 million which will be paid byinstalments;

ii. The Islamic financial institution subsequently appoints a contractor to undertake the renovation works of the premise according to the specificationsas stipulated in the agreement at a price, for example, RM1 million to be paidin cash;

iii. The customer will pledge a conventional bond as security to secure the financing. The bond which has been pledged will be liquidated by the Islamicfinancial institution (only up to the principal value of the bond without interest)if the customer failed to honour the instalment due according to the termsand conditions of the agreement; and

iv. In case of failure to complete the renovation, the customer is not required topay the pre-agreed price and the Islamic financial institution will enforce theterms and conditions of the agreement to claim compensation from the contractor.



In this regard, the SAC was referred to on the following issues:

i. Whether the proposed project financing based on istisna` contract is permissible;and

ii. Whether the Islamic financial institution may accept a conventional bond as asecurity for the Islamic financing.

Resolution

The SAC, in its first special meeting dated 13 April 2007, has resolved thefollowing:

i. The proposed structure and mechanism for the project financing basedon istisna` contract is permissible. However, the usage of the renovatedbusiness premise shall comply with the Shariah; and

ii. Conventional bond as a security for the Islamic financing is permissible.

Basis of the Ruling

The aforesaid resolution by the SAC on the permissibility of istisna` is based on thefollowing hadith of Rasulullah SAW:

“Reported by Jabir bin Abdillah, a lady said: Oh Rasulullah, may I make somethingfor you to sit on it, verily I own a slave who is good in carpentry. Rasulullah SAWreplied: As you wish. Then she made a mimbar.” 19

19 Al-Bukhari, Sahih al-Bukhari,Al-Matba`ah al-Salafiyyah, 1982, v. 1, p. 162, hadith no. 449.


20 Al-Bukhari, Sahih al-Bukhari, Al-Matbaàh al-Salafiyyah, 1982, v. 4, p. 70, hadith no. 5876.21 Majallah al-Ahkam al-Àdliyyah, Matbaàh al-Adabiyyah, 1302H, p. 67:

22 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 11 (Al-Istisna` wa al-Istisna` al-Muwazi), paragraph 2 and 7.

“Reported by Nafi’, Abdullah told him: that Rasulullah SAW has ordered a goldenring. When he put on the ring, he will turn its stone towards the palm of his hand.Later, there were a lot of people who also ordered manufactured golden ring forthemselves. Then Rasulullah SAW stepped on the mimbar and praised Allah SWTand said: “I had once ordered a manufactured golden ring but now I am notwearing it anymore”, then he threw the ring and followed by the people.”20

Majallah al-Ahkam al-Àdliyyah also provides that istisna` is permissible (article389) provided that the descriptions and features of the ordered subject matterhave been mutually agreed upon (article 390). Article 391 of the Majallah statesthat istisna` payments need not be made at the time of the contract.21 Istisna` andistisna` muwazi have also been allowed by the AAOIFI as long as the relevant principles are being followed accordingly.22

In relation to the permissibility of accepting a conventional bond as a security forIslamic financing, some scholars recognise such practice since the pledge is notmade for the purpose of ownership, but merely as a security. A conventional bondis a type of liquid asset that fulfills the requirements of chargeable items.

Rasulullah SAW had also applied istisna` contract in making an order to manufacture a ring for him as narrated in the following hadith:


Mudarabah is a contract between two parties to conduct a particular joint venture.It involves the rabbul mal as investor who provides the capital, and the mudarib asentrepreneur who manages the joint venture. Any profits generated from the jointventure will be shared between the investor and the entrepreneur based on theagreed terms and ratio, whereas any losses will be solely borne by the investor.

In the Islamic financial system, a mudarabah contract is normally applied in depositacceptance, for example, current account, savings account and investment account.In addition, mudarabah contract is also applied in the interbank investment and inthe issuance of Islamic securities. In the takaful industry, mudarabah contract isused as one of the operational models as well as an underlying contract for investment in takaful fund.

16. Islamic Negotiable Instrument of Deposit Based on Mudarabah

There was a proposal to introduce Islamic Negotiable Instrument of Deposit (INID)in the Islamic Interbank Money Market. INID is a money market instrument whichis structured based on mudarabah contract with a floating profit rate, dependingon the amount of dividend declared by the Islamic financial institution from timeto time. This instrument is tradable in the secondary market in order to enhance itsliquidity.

Under the INID mechanism, an investor will deposit a sum of money with the Islamicfinancial institution which will then issue INID. As the entrepreneur, the Islamic financial institution will be issuing an INID Certificate to the investor as an evidenceof the deposit acceptance. On the maturity date, the investor will return the INIDto the Islamic financial institution and will receive the principal value of INID withits declared dividend.

In this regard, the SAC was referred to on the issue as to whether the INID productbased on mudarabah is permissible by Shariah.

Resolution

The SAC, in its 3rd meeting dated 28 October 1997, has resolved that INIDproduct based on mudarabah is permissible.

MUDARABAH


Basis of the Ruling

The floating rate feature is in line with mudarabah investment feature becausemudarabah profit will be shared together based on profit which is much influenced by variable performance of the investment or business activities. Majority of fiqh scholars unanimously agree that mudarabah is permissible inShariah based on evidences from Al-Quran, hadith and ijma` as follows:

i. Al-Quran:

“...and others travelling in the earth in quest of Allah’s bounty...”23

“Then when the prayer is finished, then disperse through the land (to carryon with your various duties) and go in quest of Allah’s bounty and rememberAllah always (under all circumstances), so that you may prosper (in this worldand the Hereafter).”24

23 Surah al-Muzammil, verse 20.24 Surah al-Jumu`ah, verse 10.

Based on the first verse cited above, the word means permissibilityto travel in managing wealth to seek the bounty of Allah SWT. Whereasthe second verse cited above generally refers to the command to mankindto disperse on the earth in effort to seek wealth and bounty provided byAllah SWT, including by joint venture and trading. Even though these versesdo not directly refer to mudarabah, both verses refer to permissibility ofconducting business.

The above hadith states three things which are deemed as blessed and one ofthem is muqaradah. The term muqaradah originates from the word qiradhwhich is commonly used by scholars in Hijaz while Iraqi scholars termed it asmudarabah. Thus, muqaradah and mudarabah are two synonymous terms having the same meaning.

iii. Ijma`

It was reported that some of the companions of Rasulullah SAW invested property of the orphans based on mudarabah.26 There was no dissenting viewamong them and it is considered as ijma`.

17. Application of Mudarabah Contract in Current Account Product

There was a proposal from an Islamic banking institution to introduce a current account product based on mudarabah. This account is different from the wadi`ahcurrent account in which the payment of dividend to customers is at the sole discretion of the bank. In this mudarabah current account, customers are entitledto share some of the profits generated based on a pre-agreed profit sharing ratioat the point of opening the current account.

In this regard, the SAC was referred to on the issue as to whether the current account product based on mudarabah is permissible in Shariah.

25 Ibnu Majah, Sunan Ibnu Majah, Dar al-Fikr, (n.d.), v. 2, p. 768, hadith no. 2289.26 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 5, p. 3925.


“Reported by Soleh bin Suhaib from his father, he said: Rasulullah SAW oncesaid: There are three blessed things; deferred sale, muqaradah and mixing barleyand wheat (for household consumption) and not for sale.”25

ii. Hadith of Rasulullah SAW:

Resolution

The SAC, in its 4th meeting dated 14 February 1998 and 59th meeting dated25 May 2006, has resolved that current account product based on mudarabah is permissible in Shariah as long as the requirements of mudarabah are fully satisfied.

Basis of the Ruling

The resolution by the SAC is in line with the permissibility of mudarabah contractin deposit instrument. In addition, withdrawal of the mudarabah current account deposit may be made at any time. This is because the condition that the mudarabah capital shall exist has been satisfied by the requirement to maintaina minimum balance limit in the current account. Thus, if the depositor withdrawsthe whole deposit amount, the mudarabah contract is considered terminatedsince it is deemed as withdrawal of the mandate in capital management by therabbul mal. This is in line with the unanimous view of the four mazhabs that amudarabah contract is revoked or terminated through express revocation, or implied action by the rabbul mal withdrawing the mandate in managing the capital.27

18. Mudarabah Investment Certificate as Security

The need for security in a particular financing is common irrespective whether itis for conventional or Islamic financing. Various assets are used as security including tangible assets and financial assets such as Mudarabah Investment Certificate. In this regard, the SAC was referred to on the following issues:

i. Whether Mudarabah Investment Certificate may be used as security. This isdue to the opinion that Mudarabah Investment Certificate shall not be usedas security for financing provided by financial institutions since there are contradictory features between mudarabah and rahn contracts. In rahn contract, if the mortgagee used the mortgaged asset (with consent of mortgagor), the mortgagee shall guarantee the mortgaged asset from any depreciation in value, loss or impairment. Such guarantee is considered as contradictory to mudarabah contract because its capital shall not be guaranteed by the mudarib; and

27 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 5, p. 3925.



ii. Whether the Mudarabah Investment Certificate may be used as security in conventional financing.

Resolution

The SAC, in its 9th meeting dated 25 February 1999 and 49th meeting dated28 April 2005, has resolved the following:

i. Mudarabah Investment Certificate may be traded and used as securityor the subject matter of the mortgage; and

ii. Mudarabah Investment Certificate may be used as security only for Islamic financing and not for conventional financing. If the certificate isused as security for conventional financing, it falls under the responsibilityof the customers themselves and it is beyond the accountability of theIslamic financial institution.

Basis of the Ruling

The permissibility of Mudarabah Investment Certificate as security is based on thejustification that mudarabah and rahn contracts are two different and separate contracts. The utilisation of mudarabah capital by the Islamic financial institution isfor investment and is based on the first contract which is mudarabah and not rahncontract. Thus, there is no issue on the need of the Islamic financial institution toguarantee the value of the mortgaged asset. This situation is seen as similar to theusage of share certificate as security whereby the mortgagee need not necessarilyguarantee the market value of the share mortgaged to him.

In addition, the Mudarabah Investment Certificate is an asset that has a value. Assuch, it may be traded and used as a security based on the following fiqh maxim:

“Every asset that can be sold, can be charged/mortgaged.”28

28 Ibnu Qudamah, Al-Mughni, Dar `Alam al-Kutub, 1997, v. 6, p. 455.


19. Profit Equalisation Reserve

Profit rate declared by an Islamic financial institution usually fluctuates due to fluxin income, provisioning and deposits. If the declared profit rate is often fluctuatingand uncertain, it may potentially affect the interest and confidence of investors.Hence, there was a proposal to introduce Profit Equalisation Reserve (PER) to createa more stabilised rate of return to maintain the competitiveness of the Islamic financial institution.

PER is a provision shared by both the depositors/investors and the Islamic financialinstitution. It involves an allocation of relatively small amount out of the gross income as a reserve in times where the Islamic financial institution is making ahigher return as compared to market rate. The PER will then be used to top upthe rate of return in situations where the Islamic financial institution is making alower return than the market rate. Under this PER mechanism, the rate of returndeclared by the Islamic financial institution will be more stable in the long run.

In this regard, the SAC was referred to on the issue as to whether the PER mechanism may be implemented in Islamic finance, specifically in the context ofmudarabah investment.

Resolution

The SAC, in its 14th meeting dated 8 June 2000, has resolved that the proposal to implement PER is permissible.

Basis of the Ruling

According to the general method of investment in Islam, distribution of profit between the Islamic financial institution and the investors shall be based on anagreed ratio. Notwithstanding that, in order to ensure the sustainability of Islamicfinancial system and market stability, the PER mechanism may be implementedon the condition that transparency shall be taken into account.

Even though this method may reduce the return to the investors or depositors intimes when the Islamic financial institution is making higher profit, it generally allows the rate of return to be stabilised for a long term and ensures a reasonablereturn to the investors when the institution is making a relatively lower profit. Thisis considered a fair mechanism as both the Islamic financial institution and investors/depositors jointly contribute and share the benefits of PER.

This is also in line with the concept of waiving of right (mubara’ah) allowed by theShariah which means waiving a portion of right to receive profit for the purpose ofachieving market stability in the future.29

20. Administrative Costs in Mudarabah Deposit Account

The SAC was referred to on a proposal from an Islamic financial institution in itscapacity as a fund manager to charge administrative cost on depositors as investorsfor mudarabah investment deposit account.

Resolution

The SAC, in its 16th meeting dated 11 November 2000, has resolved that anIslamic financial institution shall not charge any administrative costs to depositors for mudarabah deposit account. Instead, any additional amountto cover the administrative cost should have been taken into considerationin determining the pre-agreed profit sharing ratio among the contractingparties.

Basis of the Ruling

Based on mudarabah principles, the fund manager shall manage all duties relatedto the investment of the fund according to ̀ urf. He is not entitled to charge any feeon service or incidental administrative cost since it is part of his responsibilities asmudarib.

29 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 2000, 13th Convention, resolution no. 123 (13/5).

S HAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE30

21. Intra-Day Transaction as an Islamic Money Market Instrument

Intra-day transaction refers to investment of fund based on mudarabah with itsmaturity and settlement taking place on the same day. It was introduced in IslamicInterbank Money Market to enable the market participants to ensure that theirfinancial needs are stable in a particular point of time. The method of intra-daytransaction is similar to the Mudarabah Interbank Investment. The difference isonly in terms of maturity period, whereby the Mudarabah Interbank Investmentinvolves maturity period between overnight up to one year, whereas the intra-day transaction involves a short maturity period between 9.00 am until 4.00 pmon the same day.

In this regard, the SAC was referred to on the issue as to whether the intra-daytransaction may be implemented as an instrument in the Islamic Interbank MoneyMarket since there is a concern that its short investment maturity period may affect the validity of a mudarabah contract.

Resolution

The SAC, in its 19th meeting dated 20 August 2001, has resolved that intra-day transaction may be implemented in Islamic money market.

Basis of the Ruling

The mudarabah contract in intra-day transaction may be implemented eventhough its investment maturity period is short. This is due to the efficiency of theelectronic system and information technology at present. Thus, once a fund is received, it may promptly be used to generate profits.


22. Indirect Expenses

The SAC was referred to on the issue as to whether indirect expenses may be considered as deductible costs from mudarabah fund. Indirect expenses includeoverhead expenses, staff salaries, depreciation of fixed assets, settlement expenses,general administrative expenses, marketing and IT expenses.

Resolution

The SAC, in its 82nd meeting dated 17 February 2009, has resolved that indirect expenses shall not be deducted from mudarabah fund.

Basis of the Ruling

The aforesaid resolution is based on the consideration of the following arguments:

i. Majority of scholars, among others, Imam Abu Hanifah, Imam Malik andZaidiyyah is of the opinion that a mudarib is entitled to the cost of long distancetravelling (musafir) expenses and not recurring cost from mudarabah profit (ifany), and if there is none, he may take from the capital just to meet his needsfor food, drinks and his clothing;

ii. Imam Syafii view that a mudarib is not allowed to charge any cost either director indirect expenses as the mudarib is already entitled to a certain percentageof the mudarabah profit;30 and

iii. In order to avoid cost manipulation and to safeguard the interest of depositors,indirect expenses shall not be deducted from the mudarabah fund since suchcost should have been taken into account in the determination of the pre-agreed profit sharing ratio.




23. Assignment of Weightage

In the current practice, some Islamic financial institutions will assign a weightage(from 0.76 to 1.24) to every type of deposits in determining the amount of profitto be distributed among the depositors of each type respectively. A weightagehigher than 1.0 means higher profit for the depositors as compared to profit sharing ratio, whereas a weightage which is lower than 1.0 leads to lower profitthan the agreed profit sharing ratio. Normally, a higher weightage is assigned todeposits with a longer term of maturity. Such practice of assigning differentweightage for different types of deposit is meant to facilitate the Islamic financialinstitution in managing mudarabah deposits with a standardised profit sharingratio.

In this regard, the SAC was referred to on the issue as to whether the assignmentof weightage by Islamic financial institutions is allowed.

Resolution

The SAC, in its 82nd meeting dated 17 February 2009, has resolved thatassignment of weightage by Islamic financial institutions is not allowed.

Basis of the Ruling

The aforesaid SAC’s resolution on the prohibition of assignment of weightage byIslamic financial institution is based on Al-Kasani’s view in Badaì al-Sanaì fi Tartibal-Syaraì, which states that a fasid (void) condition that carries an element of uncertainty in relation to profit distribution will render the contract fasid. In a mudarabah contract, the subject matter that is contracted upon is profit, hence,uncertain and unknown subject matter will render the contract fasid.31

31 Al-Kasani, Badaì al-Sanaì fi Tartib al-Syaraì,Dar al-Kutub al-Ìlmiyyah, 1986, v. 13, p. 250:

“Basically, regarding a fasid (void) condition, when it (fasid condition) is included in a particular contract, it shouldbe observed as to whether it leads to jahalah (unknown) of the profit, (if it does) then the contract becomes fasid,because profit is the subject matter of the contract, and jahalah of the subject matter renders a contract as fasid.”


In addition, based on further observation, it is noted that:

i. The assignment of weightage will affect the calculation of net profit for bothmudarib and rabbul mal;

ii. It changes the pre-agreed profit sharing ratio to a new effective profit sharingratio;

iii. The presumption that a long term investment is riskier is inaccurate since risksare closely related to the type and area of the investment portfolio; and

iv. The issue of non-transparency arises since weightage is an internal practice thatis not disclosed to the depositors as the rabbul mal.

24. Practice of Islamic Financial Institutions in Transferring MudarabahInvestment Profit to Customer to Avoid Displaced Commercial Risk

In a dual banking system, when there is an increase in the current market rate ofreturn, customers would also expect an increase in the rate of return from Islamicfinancial institutions. In the context of mudarabah investment account, the i nstitutions will transfer a portion of their profit to the customer to avoid displacedcommercial risk so that the declared rate will be competitive with the prevailingmarket rate of return.

In this regard, the SAC was referred to on the issue as to whether the institutionsare allowed to transfer a portion of their profits to customers to avoid displacedcommercial risks in mudarabah investment accounts.

Resolution

The SAC, in its 82nd meeting dated 17 February 2009, has resolved that thepractice of Islamic financial institutions to forgo part of their profits to customer to avoid displaced commercial risk in the context of mudarabah investment is permissible.


Basis of the Ruling

The aforesaid decision is based on the following considerations:

i. The profit in a mudarabah contract is an exclusive right of the contracting parties. Mutual agreement to review the pre-agreed profit sharing ratio willnot affect the entitlement of either the rabbul mal or the mudarib to the profit.In addition, the profit will remain as the rights shared between them; and

ii. The practice of the Islamic financial institution in forgoing part or its entireshare of profits on mudarabah fund is permissible since it is implemented bythe Islamic financial institution without affecting the customers’ right. Furthermore, the customers will receive more profit than the pre-agreed profitsharing ratio.

25. Third Party Guarantee on Liability of a Mudarib’s Counterparty inMudarabah Transaction

Basically, a mudarib shall not guarantee the mudarabah capital. However, the SACwas referred to on the issue as to whether a third party may guarantee the liabilityof any party who deals with the mudarib in mudarabah transaction.

Resolution

The SAC, in its 90th meeting dated 15 August 2009, has resolved that a thirdparty guarantee on liability of any party who deals with the mudarib in mudarabah transaction is permissible.


Basis of the Ruling

Third party guarantee of capital and performance on the liability of the party whodeals with the mudarib in mudarabah transaction is permissible based on the consideration that such third party guarantee is consistent with the permissibilityof kafalah contract. In a kafalah contract, the third party guarantor shall be a partywith no direct interest in the mudarabah business.

A third party guarantee may be granted in two approaches as follows:

i. Guarantee without recourse: This guarantee is made based on tabarru` by athird party who is not involved or related to the mudarib. In this approach, theguarantor will have no recourse on the mudarib for the guaranteed amountpaid to rabbul mal. According to the views of contemporary scholars, there areno Shariah impediments for a party to donate a sum of money for tabarru` purposes. If such tabarru` is contingent upon meeting certain requirements, thetabarru` shall be furnished by the donor as soon as the requirements are met;32

or

ii. Guarantee with recourse: In this approach, a third party will pay the guaranteedamount and later claim from the mudarib for reimbursement of the amountpaid to the rabbul mal. This amount is deemed as a debt owed by mudarib tothe guarantor.

26. Mudarib’s Guarantee on Liability of His Counterparty in MudarabahJoint Venture

Basically, a mudarib shall not guarantee the mudarabah performance. However,there is confusion as to whether, in a mudarabah joint venture, the mudarib mayguarantee liability of a party, whom he is dealing with, to ensure that the capitaland/or profit is guaranteed. In this regard, the SAC was referred to on the issue regarding mudarib’s guarantee on the liability of his counterparty in the mudarabahjoint venture.

32 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami,1987, no. 4, v. 3, p. 1875 -1876.


Resolution

The SAC, in its 90th meeting dated 15 August 2009, has resolved that in amudarabah joint venture, mudarib is not allowed to guarantee liability ofany party who deals with him for the purpose of guaranteeing the capitalonly or capital and profit in a particular mudarabah contract.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the following considerations:

i. Mudarib’s guarantee on a third party performance in mudarabah transactionin relation to mudarabah joint venture managed by him will lead to him beingthe guarantor for the mudarabah capital; and

ii. Mudarib’s negligence in dealing with a third party related to mudarabah capital will cause the mudarib to be responsible for any losses incurred andnot the third party. This is because the mudarib is responsible to use his expertise in managing the mudarabah fund. If it is proven that the losses aredue to the negligence of mudarib, then he is liable to refund the capital torabbul mal. Rabbul mal is entitled to receive adequate and reasonable guarantee for the capital against the mudarib. This is permissible provided thatthe rabbul mal does not claim any compensation except in cases of misconduct, negligence and breach of terms of contract by the mudarib.33

33 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Standard no. 13 (Al-Mudarabah), paragraph 4/4.

27. Capital Contribution by Mudarib in Mudarabah Joint Venture

The SAC was referred to on the issue of capital contribution by mudarib into themudarabah joint venture fund which has been contributed by more than one rabbulmal.

Resolution

The SAC, in its 90th meeting dated 15 August 2009, has resolved that capitalcontribution by mudarib into the mudarabah joint venture fund is permissible. Such contribution is valid based on musyarakah principles. Thus,the profit and loss sharing shall be done according to musyarakah principlesand consequently, the profit will be shared in accordance with the agreedprofit sharing ratio in the mudarabah contract.

Basis of the Ruling

The aforesaid resolution is based on the following considerations:

i. There is no impediment for a group of rabbul mal to combine their capitalamongst themselves together with mudarib’s capital since such practice is basedon their mutual agreement; and

ii. If the mudarib mixed his own fund with the mudarabah capital, he shall thenbecome a partner (musyarik) for such contribution and at the same time he shallbe the mudarib for the capital contributed by the rabbul mal. In sharing theprofit, the mudarib will be entitled to his portion of profit based on his contributed capital. On the other hand, the profit from mudarabah capital contributed by the rabbul mal will be distributed between the rabbul mal andthe mudarib based on the agreed profit sharing ratio.34

34 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Standard no. 13 (Al-Mudarabah), paragraph 9/1/6.


28. Third Party Guarantee for Capital and/or Profit in MudarabahTransaction

The SAC was referred to on the issue as to whether a third party may guaranteethe capital and/or profit of mudarabah transaction.

Resolution

The SAC, in its 91st meeting dated 1 October 2009, has resolved that athird party guarantee on the capital and/or expected profit in a mudarabahtransaction is allowed on the condition that the third party who will providethe guarantee shall be an independent party and does not have any kindof relationship, whether directly or indirectly, with the mudarib. In the eventwhereby the third party guarantor is allowed to claim the guaranteedamount from a sukuk issuer if there is a loss, or he is charging a fee forsuch guarantee, such a guarantor will be classified as a limited third party,thus, the abovementioned condition has not been satisfied.

Basis of the Ruling

A guarantee of capital and/or expected profit by a third party in a mudarabahtransaction is based on maslahah which is to ensure continuous investors’ confidence in investing into the country’s significant projects.


Musyarakah is a contract of partnership between two parties or more to finance aparticular business joint venture whereby all parties contribute the capital either inthe form of cash or others. Any profits incurred from the partnership will be sharedamongst them based on an agreed ratio, whereas any losses incurred will be borneby them according to their ratio of respective capital contribution. Currently, themusyarakah concept is applied in investment and financing activities. Financingbased on musyarakah covers working capital financing, trade financing and assetfinancing.

29. Financing Products Based on Musyarakah

An Islamic financial institution proposed to offer two types of financing productsbased on musyarakah. Among the general requirements for both of the proposedmusyarakah-based financing are as follows:

i. All partners in the musyarakah shall contribute capital;

ii. The Islamic financial institution as a partner/financier may stipulate certain conditions (taqyid);

iii. Profit sharing is based on an agreed ratio whereas loss bearing is based on capital contribution ratio;

iv. No guarantee on capital. A guarantee may only be given to cover cases of negligence and breach of terms of musyarakah agreement;

v. Profit sharing ratio may be changed upon mutual consent of all partners;

vi. In repurchasing shares of any partners, the price shall be based on market value(qimah suqiyyah) or based on mutual agreement and shall not be based on nominal price (qimah ismiyyah); and

vii. Any partners in the musyarakah may stipulate a condition that allows one ofthe partners to waive his entitlement (tanazul) to an amount of profit that exceeds a certain ceiling limit.

MUSYARAKAH SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE40


The proposed two types of musyarakah-based financing are as follows:

1. Joint venture project or partnership based on joint account without establishment of a separate entity

The musyarakah financing agreement will be concluded between the Islamicfinancial institution and customer. The financing will be credited into a jointaccount in a lump sum or in stages. The joint account will be registered underthe customer’s name whereas the management of the account’s transactionswill be jointly managed by the Islamic financial institution and the customer.

2. Equity participation through establishment of a private limited joint venturecompany under Companies Act 1965

A corporate entity will be established by the Islamic financial institution andthe customer to operate a specific project. The company’s management willbe appointed by both parties to represent their interests and to be responsibletowards the development of the project. The Islamic financial institution willdisburse the musyarakah financing in one lump sum through additional paidup capital of the private limited company.

In this regard, the SAC was referred to on the issue as to whether the two typesof musyarakah-based financing as proposed are permissible in Shariah.

Resolution

The SAC, in its 53rd meeting dated 29 September 2005, has resolved thatthe proposed financing products based on musyarakah are permissible aslong as there is no element of capital and/or profit guarantee by any of thepartners on the other partners.

Basis of the Ruling

The aforesaid resolution is based on the following evidences on permissibility ofmusyarakah:

i. Allah SWT says:

“…truly many partners (in all walks of life) are unjust to one another; but notso those who believe and do good works, and they are few…” 35

The term in the above verse means partnership. Based on the verse,musyarakah is a part of the previous practices of Messengers of Allah SWT before Prophet Muhammad SAW that has not been abrogated. This practiceexisted since the time of Prophet Daud and had never been forbidden byProphet Muhammad SAW. However, musyarakah shall be practised in a justmanner and in accordance with the Shariah.

ii. When Rasulullah SAW was appointed as the Messenger of Allah SWT, the Arabcommunity had already been conducting transactions based on musyarakah,and Rasulullah SAW allowed it as shown in his saying:

“The aid of Allah SWT will always be upon two persons who are having partnership as long as one of them does not betray his partner. If one of thembetrays his partner, then Allah SWT will uplift His aid from both of them.”36

iii. It was reported that a companion of Rasulullah SAW indicated the permissibilityof musyarakah as follows:

35 Surah Sad, verse 24.36 Al-Daraqutni, Sunan al-Daraqutni, Mu’assasah al-Risalah, 2004, v. 3, p. 442, hadith no. 2934.37 Al-Zaila`i, Nasb al-Rayah li Ahadis al-Hidayah, Mu’assasah al-Rayyan, 1997, v. 3, p. 475.38 Abdul Razzaq al-San`ani, Musannaf Abdul Razzaq, Al-Maktab al-Islami, 1403H, v. 8, p. 248.

“The profit is based on what has been stipulated and the loss is based on theamount of the capital (contributed by the partners).” 37

“The loss is based on the amount of the capital, and the profit is based on whathas been stipulated.” 38

iv. Generally, scholars are in consensus in permitting partnership or musyarakah,even though they are of different opinions on the permissible types ofmusyarakah.


30. Financing Based on Musyarakah Mutanaqisah

There was a proposal from an Islamic financial institution to offer Islamic housefinancing product based on the concept of musyarakah mutanaqisah. In general,the modus operandi of the house financing product based on musyarakah mutanaqisah is as follows:

i. A customer who wants to buy a real property applies for financing from theIslamic financial institution;

ii. The Islamic financial institution and the customer will jointly purchase the realproperty based on a determined share (for example 90:10) depending on theamount of financing requested;

iii. The deposit paid by the customer is deemed as his initial share of ownership;

iv. The Islamic financial institution’s share of ownership will be leased (based onijarah) to the customer; and

v. The monthly instalment by the customer will be used to gradually purchasethe share of the Islamic financial institution until the entire share of the Islamicfinancial institution is fully purchased by the customer.


i. Whether the collective usage of musyarakah and ijarah agreements in onedocument of musyarakah mutanaqisah is allowed since such collective usagemay be perceived as having two transactions in one sale and purchase contract(bai`atain fi al-bai`ah) which is prohibited in Shariah; and

ii. Whether a pledge may be imposed by one of the owners of the asset overthe jointly owned asset.


Resolution

The SAC, in its 56th meeting dated 6 February 2006, has resolved the following:

i. Collective usage of contracts of musyarakah and ijarah in one documentof agreement is permissible as long as both contracts are concluded separately and clearly; and

ii. A pledge in musyarakah mutanaqisah may be imposed if the pledge document involves only the customer’s shares being pledged to the Islamic financial institution. This is because beneficial ownership is recognised by the Shariah.

Basis of the Ruling

The aforesaid resolution has considered that a musyarakah mutanaqisah contractthat uses both musyarakah and ijarah contracts is deemed as one form of contemporary contract (ùqud mustajiddah) recognised by fiqh scholars in order tofulfill the contemporary needs of Islamic muàmalah.39

Shariah allows certain forms of management (tasarruf) of musyarakah assets.Among others, both partners in a musyarakah contract are entitled to transact orlease the musyarakah asset because partnership carries wakalah features. Thus,each partner may become an agent for the other partner in transacting or leasing,including selling and purchasing or leasing each other’s shares of the musyarakahasset among themselves.40 In addition, a partner is also allowed to give and receivea pledge of the musyarakah asset with the permission of the other partner. This isin line with the following fiqh maxim:

39 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 12 (Al-Syirkah), paragraph 3/1/3/1.40 Ibnu Àbidin, Hasyiyah Radd al-Muhtar àla al-Durr al-Mukhtar Syarh Tanwir al-Absar, Dar Àlam al-Kutub, 2003, v.6, p. 488.

41 Ali Ahmad al-Nadwi, Jamharah al-Qawaìd al-Fiqhiyyah fi al-Muàmalat al-Maliyyah, Syarikah al-Rajhi al-Masrafiyyahli al-Istithmar, 2000, v. 2, p. 834, maxim no. 1591.

“All items that can be sold, can be pledged.”41


31. Application of Wa`d as a Mechanism in Dealing with Customer’sDefault in Financing Based on Musyarakah Mutanaqisah

In a financing based on musyarakah mutanaqisah, Islamic financial institutionsare exposed to various risks including market risk that relates to joint ownershipof the financed asset, as well as credit risk which relates to the customer’s obligation to pay rent to the Islamic financial institution and subsequently to purchase the asset from the Islamic financial institution. In this regard, the SACwas referred to on the application of wa`d as an appropriate mechanism in dealingwith customer’s default in financing based on musyarakah mutanaqisah contract.

Resolution

The SAC, in its 64th meeting dated 18 January 2007 and 65th meeting dated30 January 2007, has resolved that the wa`d clause by the customer topurchase the musyarakah asset may be included in the musyarakah mutanaqisah agreement to deal with customer’s default. However, suchwa`d shall be applied fairly without denying the profit and loss sharing element among the contracting parties.

In the event of customer’s default that causes force sale of the asset to athird party, the Islamic financial institution as the financier is entitled to demand a sum for any deficit (including payment of rent in arrears andpurchase of the Islamic financial institution’s shares by the customer) fromthe customer based on the agreed wa`d according to the following procedural flow:

i. The Islamic financial institution may take the customer’s portion fromthe proceeds of the auction to cover any deficit;

ii. In the event where there is still a deficit (after the Islamic financial institution has taken the customer’s portion), the Islamic financial institution may demand the remaining deficit amount if the customeris financially capable; and



iii. If the customer is proven to be financially incapable to settle the outstanding amount of demand, the Islamic financial institution shall bearthe loss.

If there is any excess amount from the proceeds of the auction, the Islamic financial institution may share it with the customer based on their percentageratio of ownership of the asset at the time of auction.

Basis of the Ruling

Al-Zarqa’ has concluded that Shariah allows the contracting parties to stipulateconditions within the limits of their rights under a particular contract. Distinctiveconditions in some ùqud mustajiddah (contemporary contracts) as compared toconditions in other contracts which are known in fiqh shall be scrutinised as follows:

i. If the condition eliminates any textually required condition (by al-Quran or Sunnah), it is forbidden;

ii. If the condition eliminates a condition that is established by ijtihad of scholars,its ruling is dependent on the effective cause (ìllah) of the latter, relevant ùrfand current economic surrounding; and

iii. If the condition of the contemporary contract is unknown in fiqh literature, suchcondition is deemed as permissible as long as it carries the interests of the contracting parties and does not invalidate or deny the objectives of the contract. Such condition will be considered as fasid and negatively affecting thecontract if it leads to forbidden matter and denies the objective of the contract.42


43 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 33, p. 111. In addition, qard terminologically means giving of property by one person to another with something subjected tothe liability of the debtor in form of property with the same value (mumathil) of the property that was loaned tohim. It is meant to be benefitted by the recipient (debtor). (Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr,2002, v. 5, p. 3786).

QARD

Qard means giving a property to a party who will benefit from it and who will subsequently return an equivalent replacement.43 In the early stages of Islamic finance in Malaysia, several products based on qardwere introduced, for example,Government Investment Certificates (currently known as Government InvestmentIssue) and benevolent loans. Nowadays, its application has been expanded toother products such as rahn loans, credit cards, charge cards and others. It hasalso become the underlying concept for liquidity management instruments for Islamic financial institutions.

32. Qard Principles in Islamic Finance

The application of qard hasan concept in a correct manner which fulfills theShariah requirements would definitely benefit the contracting parties. However,if it is inappropriately applied, it would potentially tarnish the image of the Islamic financial system. Among the issues that may arise in Islamic finance relating tothe application of qard hasan are:

i. Whether qard hasan in its true sense implies a gift that does not require repayment or otherwise. This refers to the situation where the Islamic financialinstitution decides to bring a case of a defaulted customer in a financing basedon qard hasan to court; and

ii. Since Islamic financial institutions provide financing by utilising the depositsof customers who expect returns, financing based on qard hasan does not effectively serve such purpose because qard hasan is not meant to generateprofits, rather it is benevolent or tabarru` by nature.

In this regard, the SAC was referred to on the issue as to whether a financingproduct based on qard principles is allowed since the application of this conceptin a financing product may contradict the original meaning of qard according toShariah. The SAC was also referred to on the issue as to whether the word“hasan” may be taken out from the term “qard hasan” that has generally beenacceptable in the Islamic financial system.


Resolution

The SAC, in its 51st meeting dated 28 July 2005, has resolved that financingproducts based on qard principle are permissible. However, the word“hasan” shall be taken out from the term “qard hasan” to imply that it isan obligation for the borrower to repay his qard to the lender or financierand such obligation shall be borne by the heirs of the borrower in the caseof his death before the total settlement of his loan obligation.

Basis of the Ruling

The scholars define qard as affectionately giving a property to a party who will benefit from it and who will subsequently replace it.44 The scholars have unanimously agreed that qard is permissible based on al-Quran, Sunnah and ijma`.45

The following Quranic verse is regarded as a basis for permissibility of qard:

“Who is that will grant Allah a goodly (sincere) loan so that He will repay him manytimes over? And (remember) it is Allah who decreases and increases (sustenance),and to Him you shall all return.”46

According to scholars of tafsir, the term qard hasan in the context of the aboveverse refers to acts of contributing for the sake of Allah SWT (infaq). The term qardliterally means loan and not infaq. Nevertheless, the scholars of tafsir stated thatthe term qard used in this verse is intended to dignify the status of mankind sinceAllah SWT had chosen to communicate using common and understandable vocabulary with mankind.47 The permissibility of qard in the context of loans isbased on the literal meaning of the above verse since Allah SWT will not probablymention and equate commendable matter like infaq with forbidden matters. Thisindicates that qard is permissible.

44 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 33, p. 111.45 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 33, p. 112.46 Surah al-Baqarah, verse 245.47 Al-Syawkani, Fath al-Qadir, Dar al-Ma`rifah, 2007, p. 168.


In relation to the recommendation that Islamic financial institutions shall not usethe word “hasan” in the term qard hasan, the SAC justified its decision based onthe following arguments:

i. The fiqh scholars had never elaborated the term qard hasan specifically butonly discussed the concept of qard and its permissibility in Shariah. Generally,qard hasan relates to matters pertaining to contribution for the sake of AllahSWT (infaq); and

ii. The word “hasan” as used in al-Quran refers to an infaq that is given sincerelyfor rewards from Allah SWT.48

Based on this fact, it is concluded that the use of the term qard hasan to refer toa loan especially in the muàmalah context in Islamic finance is inaccurate. This isbecause qard as defined by fiqh scholars is a loan (qard) that must be settled.Thus, the term qard is seen more appropriate for an interest free loan as practisedin the current Islamic finance industry.

33. Liquidity Management Instrument Based on Qard

Liquidity management instrument is an instrument used to ensure that the liquidity of financial institutions is at an optimum level. It is specifically used toabsorb the liquidity surplus in the market. Islamic financial institutions with liquidity surplus will be able to channel the surplus to Bank Negara Malaysia viathis instrument. Previously, most of the Islamic liquidity management instrumentswere based on mudarabah and wadiàh.

Thus, there was a proposal to introduce liquidity management instruments basedon qard as an additional instrument for managing liquidity in the Islamic financialsystem. The proposed mechanism of liquidity management instruments based onqard is as follows:

48 Al-Suyuti, Al-Durr al-Manthur fi al-Tafsir bi al-Ma’thur,Dar Kutub al-Ìlmiyyah, 2000, v. 1, p. 554 - 556.


i. Bank Negara Malaysia will issue a tender through FAST system (Fully AutomatedSystem for Issuing/Tendering) disclosing the amount of loan to be borrowed;

ii. The tender is based on uncompetitive bidding whereby bidders will only bid forthe nominal amount that they are willing to loan to Bank Negara Malaysia;

iii. The successful bidder will provide the loan based on tenure until maturity; and

iv. Upon maturity, Bank Negara Malaysia will pay back the loan in total. Hibah (ifany) may be given at the discretion of Bank Negara Malaysia.

In this regard, the SAC was referred to on the permissibility of the proposed liquidityinstrument based on qard.

Resolution

The SAC, in its 55th meeting dated 29 December 2005, has resolved that liquidity management instruments based on qard, which is a contract of interest free loan between Islamic financial institution and Bank NegaraMalaysia to fulfill the need of short-term loan are permissible. Bank NegaraMalaysia as the borrower may pay more than the borrowed sum in the formof hibah at its discretion. Nevertheless, the hibah shall not be pre- conditioned.

Basis of the Ruling

The permissibility of liquidity management instruments based on qard is attributedto the permissibility of qard contract. Such products are important in meeting thecountry’s needs to manage liquidity.


“From Jabir r.a who said: I came to see Rasulullah SAW when he was in the masjid(Misàr said that Jabir came during dhuha time), Rasulullah SAW asked me to perform a two rakaàt prayer, he paid the debt that he owed to me and added toit.”50

Settlement of debts with additional values or benefits is allowed as long as it isnot stipulated in the contract and has not become a known ùrf. However, if itbecomes a common practice due to a given loan, such practice shall be discontinued since a common practice or ùrf is equivalent to a stipulated condition.51

34. Combination of Advance Profit Payment Based on Qard andMurabahah Contract

There was a proposal from an Islamic financial institution to offer an Islamic investment deposit account product with a fixed return. In implementing thisproduct, the Islamic financial institution proposed to apply a commodity murabahah contract to create indebtedness of the Islamic financial institution tothe depositors or investors. One of the new features of this product is the advanceprofit based on qard given to depositors upon the opening of the account.

49 Ibnu Hajar al-Àsqalani, Bulugh al-Maram min Adillah al-Ahkam, Matbaàh al-Salafiyyah, 1928, p. 176.50 Al-Bukhari, Sahih al-Bukhari, Al-Matbaàh al-Salafiyyah, 1982, v. 2, p. 173, hadith no. 2934.51 Abdul Hamid Mahmud Tahmaz, Al-Fiqh al-Hanafi fi Thawbihi al-Jadid, Dar al-Qalam, 2001, v. 4, p. 220 – 221.

Basically, any stipulated benefit, hibah or additional value in consideration of aloan is prohibited. It is stated in the following hadith of Rasulullah SAW:

“From Ali r.a who said, that Rasulullah SAW said: Every loan which brings benefits(to the creditor) amounts to riba.”49

However, if the benefit, hibah or additional value is given unconditionally, it ispermissible. This is based on the following hadith of Rasulullah SAW:



In this regard, the SAC was referred to on the issue as to whether the combinationof advance profit payment based on qard and murabahah contract in the structureof the aforesaid proposed product is permissible in Shariah.

Resolution

The SAC, in its 4th special meeting dated 29 November 2007, has resolvedthat a combination of advance profit payment based on qard and murabahah contract is not allowed.

Basis of the Ruling

There is a clear prohibition from the sources of Shariah in relation to the combination of qard with any contracts of exchange (ùqud muàwadhat). Amongothers, there is a hadith of Rasulullah SAW that prohibits the combination of saleand qard:

“Ismail bin Masùd had told us from Khalid from Hussein al-Muàllim from Àmrubin Shuaib from his father from his grandfather: Verily Rasulullah SAW forbids combination of salaf (debt) and sale, two conditions within a sale, and profit without guarantee (without taking a risk).” 52

52 Al-Nasa’i, Sunan al-Nasa’i al-Kubra, Dar al-Kutub al-Ìlmiyyah, 1991, v. 4, p. 43, hadith no. 6225.

RAHN

In the current context of Islamic finance, rahn refers to a contract of security. Conceptually, rahn means requiring a particular asset to be made as security fora financing or loan so that in the event of default by the financing receiver ordebtor, the financing or loan may be satisfied out of the value of the security orthe financed asset.53 In normal practice, credit facility offered by an Islamic financial institution, either under sale based or other possible methods, will besecured by an appropriate collateral with adequate value. Assets including realestate, share and investment certificates are forms of security that are acceptedby the Islamic financial institution throughout a particular financing or loan tenure.

35. Two Financing Facilities Secured by an Asset

There is an asset charged for two facilities, namely bai` bithaman ajil (BBA) andalso conventional overdraft facility which is offered by a financial institution. Thefirst charge is made to secure the BBA financing facility. In the event of default inthe BBA financing facility, which consequently entails foreclosure of the asset, thefinancial institution will terminate the conventional overdraft facility since the latter is no more secured by any security. The termination of the conventionaloverdraft facility is enforced through a cross default clause as stipulated in theBBA agreement between the financial institution and customer.


i. Whether an asset may be used to secure both the BBA financing facility andconventional overdraft facility; and

ii. Whether the financial institution may include the cross default clause in a BBAlegal document.

53 Al-Subki, Takmilah al-Majmu’ Syarh al-Muhazzab, Maktabah al-Irshad, 1980, v. 12, p. 299; Ibnu Qudamah, Al-Mughni, Dar `Alam al-Kutub, 1997, v. 6, p. 443.



Resolution

The SAC, in its 4th meeting dated 14 February 1998, has resolved that anasset may be used to secure more than one financing facility, subject to thefollowing requirements:

i. Prior consent from the first chargee is duly obtained;

ii. The value of the charged asset is sufficient to secure all charges; and

iii. No harm (dharar) is inflicted upon any parties.

In addition, the SAC has also allowed the financial institution to include thecross default clause in the BBA legal document.

Basis of the Ruling

An arrangement whereby a portion of an asset is charged for a facility and the remaining value is subsequently charged for another facility is governed under theprinciple of rahn al-musya` or the undivided right to claim security over a chargedasset.54 Majority of Maliki, Syafii and Hanbali scholars who allow rahn al-musya`view that if an undivided asset has been partially charged to secure a particularloan (or financing), then the remaining part of the asset may be subsequentlycharged (to secure the same loan or another loan) to the same chargee or anotherchargee.

However, if the subsequent charge (of the remaining part of the charged asset) isentered into with another chargee (who is not the first chargee), then prior consentof the first chargee shall be obtained.

54 Al-Sawi, Hasyiyah Al-Sawi `ala Syarh al-Saghir, Dar al-Ma`arif, 1982, v. 3, p. 307.


36. Dealing with a Charged Asset

The appreciation of the market value of a charged asset, particularly a real estateleads to a situation where the security value is more than enough to cover the financing amount compared to when it was initially charged. In addition, consistent payment of debt by the debtor in accordance to the agreed schedulewill gradually reduce the amount of outstanding debt and will consequently leadto the security in excess of the required security coverage rate. In this situation,the owner of the charged asset may seek to charge the asset for security in another transaction (second charge) by way of charging the value that is in excessof the required first charge amount.


i. Whether the consent to the second charge given by the first chargee may beconstrued as waiver of his claim towards the asset under the first charge; and

ii. Whether a sale contract or another charge may be transacted on some partof the asset’s current value.

In relation to these issues, Imam Syafii stated his view:

”It is permissible for a person to charge half of his land, and half of his house,and a part of his undivided shares of the land and house if all parts of the assetare clearly identified and the charged portion of the asset are also identified. Inthis matter, there is no difference between charge and sale.” 55

55 Al-Syafii, Al-Umm, Bait al-Afkar al-Dawliyyah, (n.d.), p. 575:


Resolution

The SAC, in its 6th meeting dated 26 August 1998, has resolved the following:

i. The consent to the second charge given by the first chargee shall not beconstrued as waiver of his claim towards the asset under the first charge.In addition, consent of the first chargee shall be given in writing to avoidany dispute; and

ii. Any sale contract or charge transacted on some part of the total assetvalue is allowed. However the asset is deemed as an undivided property(musya`) owned by the buyers according to their respective percentageof shares. Similarly, the rights over the foreclosed charged asset shall beshared among the chargee according to the agreed terms and conditions.

Basis of the Ruling

The consent to the second charge given by the first chargee shall not be construedas a waiver of his claim towards the asset under the first charge because:

i. Prior to settlement of debt by the chargor, the first chargee still has the intereston the charged asset; and

ii. Only the remaining value of the charged asset is allowed to be charged for thesecond charge, and not the part that is charged to the first chargee.

The consent of the first chargee to the second charge shall be clearly conducted toavoid any confusion in the usage and ownership of the charged asset.

In addition, any sale contract or charge transacted on some parts of the actual valueof the asset is allowed based on the following juristic views:


37. Conventional Fixed Deposit Certificate as Security in Islamic Financing

The SAC was referred to on the issue as to whether conventional Fixed DepositCertificate may be mortgaged for Islamic financing. In this regard, only the principal value of the fixed deposit will be mortgaged, while the amount of interest or riba will be excluded.

Resolution

The SAC, in its 9th meeting dated 25 February 1999, has resolved that conventional Fixed Deposit Certificate (excluding the amount of interest orriba) is a right or asset of the customer. Hence, it may be used as securityfor Islamic financing.

56 Al-Syafii, Al-Umm, Bait al-Afkar al-Dawliyyah, (n.d.), p. 575; al-Dusuki, Hasyiyah al-Dusuki ̀ ala Syarh al-Kabir, Dar Ihya’Kutub al-Arabiyyah, (n.d.), v. 3, p. 235; Al-Bahuti, Kasshaf al-Qina` `an Matn al-Iqna`, `Alam al-Kutub, 1997, v. 3, p. 48.

57 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 6, p. 4255.58 Al-Syafii, Al-Umm, Bait al-Afkar al-Dawliyyah, (n.d.), p. 575:

ii. Imam Syafii also stated that:

”It is permissible for a person to charge half of his land, and half of his house,and a part of his undivided shares of the land and house if all parts of theasset are clearly identified and the charged portion of the asset are also identified. In this matter, there is no difference between charge and sale.”58

”Anything that can be sold, can be charged, either it is a kind of undividedownership or otherwise.”57

i. Majority of fiqh scholars other than the Hanafi school allow charge on undetermined part of the actual value of an asset (rahn al-musya`).56 This viewrelies on the following maxim:


Basis of the Ruling

Among the main requirements of charge is that the charged asset shall be a valuable and deliverable property.59 Basically, a charged asset shall be a tangibleproperty. However, it is also permissible to charge receivables, cash, or any acceptable assets. In this context, conventional Fixed Deposit Certificate (excludingthe amount of interest or riba) has met the required features of chargeable asset.

In addition, a charge is actually a complementing contract to a particular basic transaction. It is allowed as long as the charged asset is valuable according toShariah and acceptable by the chargee.

38. Islamic Debt Securities as Collateralised Asset

There was a proposal to introduce the concept of charge in the Islamic money market to facilitate market participants to obtain funding by charging their Islamicdebt securities to other market participants. These securities are in the form ofscriptless whereby the financing receiver is only required to identify the charged securities in the system without the need to physically transfer the securities to thefinancier. The financing receiver will not make any transactions on the charged securities, either for sale or another charge to other party throughout the tenure.

In this regard, the SAC was referred to on the issue as to whether Islamic debt securities may be used as collateralised asset in a rahn contract.

Resolution

The SAC, in its 30th meeting dated 28 October 2002, has resolved that theIslamic debt securities may be charged in a rahn contract. The financing receiver is also allowed to identify the respective securities to be charged inthe system without physical transfer of the charged securities to the financier.

59 Al-Samarqandi, Tuhfat al-Fuqaha’, Dar al-Kutub al-`Ilmiyah, 1983, v. 3, p. 40.


Basis of the Ruling

The concept of rahn, which has been long practised, is a type of loan security acceptable in Islam. Security under the rahn concept includes any tradable andacceptable asset between the financier and financing receiver. In this situation,since the Islamic debt securities are valuable and tradable in the market, the certificates have satisfied the required features of acceptable securities in rahn.

The Syafii scholars allow the security to be taken and used by the chargor as longas consent of the chargee is obtained.60 The Maliki scholars, on the other hand,allow “rahn rasmi/hiyazi” which is the submission of security through officialnotes in the registry of relevant authority. This may sufficiently represent the actualsubmission.61 These views are clearly consistent with the view of contemporaryscholars who allow the utilisation of debt securities and sukuk as securities forrahn.

Therefore, scriptless Islamic debt securities used as securities are constructive inexistence. This is because such securities fulfill the criteria of acceptable securitiesin rahn, which include being valuable, tradable and transferable. In addition, thesecurities are regulated by a reliable and trusted system that has integrity and istrustworthy with a highly disciplined and transparent market.

39. Sale of Collateralised Asset in the Event of Default by FinancingReceiver to Pay the Financing Amount to Financier

Pursuant to the proposal on the introduction of the concept of charge in Islamicmoney market and Islamic debt securities as security, the SAC was referred to onthe issue relating to default of a financing receiver in payment of the financingamount to financier within an agreed term.

60 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 6, p. 243.61 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 6, p. 4240.


60

Resolution

The SAC, in its 30th meeting dated 28 October 2002, has resolved that inthe event of a default whereby the financing receiver has defaulted in payingthe financing amount to the financier within the agreed term, the financiermay sell the charged securities to redeem the financing amount due by thefinancing receiver. However, the financier shall return any excess of the securities’ value should the value exceeds the financing amount.

Basis of the Ruling

The permissibility of sale or liquidation of security in the event of default wherebythe financing receiver has failed to pay the financing amount to the financier withinthe agreed period is in line with the objectives and basic features of charge in Islam.The financier (as murtahin) may stipulate a condition requesting the financing receiver (as rahin) to appoint the former or a specified individual to sell the collateralised asset in order to settle the outstanding financing amount without theneed to refer to court. In addition, the financier is allowed to request for the saleof the collateralised asset for the settlement of overdue financing amount. Any excess from the sale price shall be returned to the financing receiver since it is partof the charge. This is based on the following hadith of Rasulullah SAW:

“From Abu Hurairah that Rasulullah SAW have said: A charged asset will not diminish from its owner (when he has not yet settled his debt). Any profit of thecharged asset belongs to its owner and any liability must be borne by him.”62

62 Ibnu Hajar al-`Asqalani, Bulugh al-Maram min Adillah al-Ahkam, Matba`ah al-Salafiyyah, 1928, p. 176.


61

40. Profit Accrued from Collateralised Asset Throughout ChargeTenure

The SAC was referred to on the issue as to whether any profit including dividendsas well as rights and bonus issues accrued from collateralised asset throughoutthe charge tenure belongs to the owner of collateralised asset which is the financing receiver.

Resolution

The SAC, in its 30th meeting dated 28 October 2002, has resolved that anyprofit including dividends as well as rights or bonus issues accrued fromcollateralised asset (marhun) throughout the charge tenure belongs to theowner of the security which is the financing receiver.

Basis of the Ruling

The owner of collateralised asset as the financing receiver in a rahn contract isentitled to any profit accrued from the collateralised asset throughout the chargetenure because the rahn contract does not involve transfer of ownership of thecollateralised asset from the chargor to the chargee. Scholars have agreed thatthe financing receiver or chargor is entitled to the profit accrued from the securitysince he is the owner of the asset.63 In addition, Imam Syafii stated that the profitof a collateralised asset amounts to its addition whereas the loss of the asset isdeemed as its destruction or reduction.64

The above juristic views are based on the following hadith of Rasulullah SAW:

“From Abu Hurairah that Rasulullah SAW have said: A charged asset will not diminish from its owner (when he has not yet settled his debt). Any profit of thecharged asset belongs to its owner and any liability must be borne by him.”65

63 Al-Juzairi, Al-Fiqh àla al-Mazahib al-Arbaàh, Al-Maktab al-Thaqafi, 2000, v. 3, p. 332 – 337.64 Al-Syafii, Musnad al-Syafii, Dar al-Basyair al-Islamiyyah, 2005, v. 1, p. 886; Al-Baihaqi, Al-Sunan al-Kubra, MaktabahDar al-Baz, 1994, v. 6, p. 65.

65 Ibnu Hajar al-Àsqalani, Bulugh al-Maram min Adillah al-Ahkam, Matbaàh al-Salafiyyah, 1928, p. 176.

Takaful refers to cooperation among a group of individuals to mutually guaranteeand aid each other in order to meet certain needs as agreed amongst them, suchas, providing compensation for a particular loss or any other kind of financial needs.Such cooperation involves contribution of money based on tabarru` concept (voluntary contribution) by all takaful participants. A specific fund will be establishedas the source of monetary assistance to any participant in accordance with theterms and conditions as agreed amongst them. In line with the concept of mutualassistance (ta`awun) and the need of the Muslims to have a Shariah compliant alternative to the conventional insurance, the takaful industry has developed rapidlyinto a viable industry that is integrated into the main stream of the national financialsystem.

41. Takaful Model Based on Tabarru` and Wakalah

A takaful company proposed to adopt a takaful model based on tabarru` andwakalah. Under the concept of tabarru`, the takaful participants agree to relinquishall or a portion of their contribution as donation to aid other takaful participantswho suffered particular losses or difficulties.

Under the wakalah contract, the takaful participants will appoint the takaful company as their agent to manage the takaful fund, which covers management ofinvestment and payment of claims, retakaful, technical reserve and managementcosts. In return, the takaful company will receive commission or fee for the servicesrendered. The fee may be charged as a fixed amount or according to an agreedratio based on investment profit or surplus in the takaful fund.

In this regard, the SAC was referred to on the issue as to whether the proposedtakaful business model based on tabarru` and wakalah is permissible.

TAKAFUL SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE62


Resolution

The SAC, in its 24th meeting dated 24 April 2002, has resolved that thetakaful business model based on tabarru` and wakalah is permissible. Thewakalah contract is concluded between the participants and the takafulcompany, whereas the tabarru` contract is concluded amongst the participants only.

In the 2nd special meeting dated 18 June 2007, the SAC has also resolvedthat a retakaful business model based on tabarru` and wakalah is permissible in Shariah.

Basis of the Ruling

Tabarru` concept is a recognised concept in Shariah. This is based on the followingverse of Allah SWT:

“...help one another in furthering virtue and God consciousness, and not in whatis wicked and sinful...”66

The permissibility of applying tabarru` in takaful business operation is also consistent with the resolution of OIC Fiqh Academy which recommends the application of tabarru` concept in developing takaful institution.67

In addition, there is no objection in Shariah on application of wakalah in takafulbusiness operation since scholars have unanimously agreed on the permissibilityof wakalah. Wakalah is a contract between a party (principal) who appoints another party (agent) to perform certain duty on behalf of the principal in representable or assignable matters according to Shariah perspective, either voluntarily or with imposition of fee. In the contexts of takaful and retakaful,wakalah fee is paid by the participants to the takaful company as an agent forperforming certain duties. The rate and mode of payment of the fee are subjectto the agreement of the contracting parties.

66 Surah al-Ma’idah, verse 2.67 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1985, 2nd Convention, resolution no. 9 (2/9).

42. Application of Musahamah Concept in Commercial General TakafulPlan

A takaful company would like to introduce musahamah concept in commercialgeneral takaful plan. Under this concept, takaful participants will pay contributionto the takaful company based on musahamah and as benefit, the takaful participants may make claim and receive compensation for any accidents or losses.If the takaful participants do not make any claim within the effective takaful tenure,they are entitled to receive return of contribution in the form of bonus (good experience refund), subject to the following conditions:

i. There is surplus in the takaful risk fund;

ii. The participant had neither made any claim nor received any compensation ina specific period; and

iii. The participant agreed to renew takaful contract for a certain period. If the participant did not renew the contract, he will be deemed as agreeing to waivehis bonus on the basis of isqat al-haq.

In this regard, the SAC was referred to on the issue as to whether the applicationof the proposed musahamah concept in general takaful plan is permissible inShariah.

Resolution

The SAC, in its 66th meeting dated 22 February 2007, has resolved that theapplication of the proposed musahamah concept in general takaful plan isnot allowed.



68 Based on the definition of the term “musahamah” given by the takaful company, it is understood that such conceptis similar to “musyarakah”. The term “musahamah” ( ) in Arabic literally means participation, taking part orsharing. It is an Arabic word that usually explains the involvement or participation of a person in a particularproject, either in the form of efforts, capital or others.

69 From Shariah perspective, the term musahamah is a new and unknown term to fiqh terminology so as to be considered as a mu`amalah contract. Referring to a book on fiqh terms compiled by Dr Nazih Hamad namely“Mu`jam al-Mustalahat al-Iqtisadiyah fi Lughat al-Fuqaha’’, such term is not included as one of the fiqh terms.

70 Al-Qarafi, Al-Furuq, Dar al-Kutub al-`Ilmiyyah, 1998, v. 1, p. 276 - 277.

Basis of the Ruling

The proposal to apply musahamah concept in general takaful plan is not allowedbecause musahamah is a concept with ambiguous meaning.68 It is also an unknown contract in fiqh muamalat.69 The musahamah definition as stated in theproposal is inconsistent with the overall features and operation of takaful, especially in cases of claims by the takaful participants. On the contrary, musahamah as defined indicates agreement amongst takaful participants to givecertain contribution.

Takaful business must be based on tabarru` concept since under this concept,takaful participants are allowed to receive payment from the takaful fund if thereis any claim due to perils or others. An element of uncertainty (gharar) in givingsuch contribution is permissible in tabarru` at contracts, in line with the view ofMaliki scholars.70

The musahamah concept was found to be unsuitable in allowing any claims andpayments to the rightful participants since musahamah, based on its general definition, is a kind of sharing in order to gain profit and is not meant for donationin paying any claims under a takaful scheme.

43. Retakaful Business Model Based on Wakalah - Wakaf

A retakaful company proposed to conduct a retakaful business based on wakalahmodel with element of wakaf. Among the special features of the proposedwakalah model with element of wakaf are as follows:

i. The retakaful company is an agent to manage the takaful contribution basedon terms of agreement that outline the rights and duties of the retakaful company and takaful company (as takaful participant);

ii. The retakaful company establishes takaful fund by contributing a sum of capitalby way of wakaf. Once the fund is established, the retakaful company will nolonger have any right over the fund. However, the takaful company has the rightto manage the fund;

iii. This initial contribution is perpetual in nature. It can neither be terminated nortransferred. Contributions made by the takaful participants will be channeledto the takaful fund. The aim of this takaful fund is to pay any claims or lossessuffered by the participants, giving benefits to eligible participants in accordancewith terms of wakaf, and giving donations to charitable organisations as approved by the Shariah Committee; and

iv. Any surplus in the takaful fund will be distributed amongst the takaful participants.

In this regard, the SAC was referred to on the issue as to whether the proposed retakaful business model based on wakalah with the element of wakaf is permissible in Shariah.

Resolution

The SAC, in its 87th meeting dated 23 June 2009, has resolved that the retakaful business based on wakalah model with the element of wakaf according to the features as stated above is permissible. However, such retakaful operation model structure based on wakalah and wakaf will notdepart from the requirement of contribution based on tabarru` by the takafulparticipants. Thus, the effect of such model is viewed to be similar with theexisting takaful model based on tabarru`.

In addition, the SAC has also resolved that the contribution of tabarru` bythe takaful participants in a takaful or retakaful agreement based on wakalahwith the element of wakaf is owned and managed by the wakaf fund butdoes not form part of the wakaf asset.



71 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 44, p. 184 –186.

Basis of the Ruling


i. Among the basic elements of the proposed model is the application of elementof wakaf. However, in the end, the fund will receive and own the contributionsof tabarru` from the takaful participants. These tabarru` contributions do notform part of the wakaf capital, rather, the contributions are managed by thewakaf entity for payment of takaful claims;

ii. Scholars of Hanafi, Maliki and Hanbali schools allow any kind of contributionor gift to a wakaf entity, either in form of building or perpetual plant, withoutchanging the status of the contribution or gift as wakaf;71 and

iii. The expressed intention and objective of the contributors and their agreementwith the wakaf entity are the main factors in determining the status of a particular contribution or gift to the wakaf entity, either as a part of the wakafasset or not. In this case, the gift or contribution made by the takaful participants is a type of tabarru` and not wakaf.

44. Takaful Coverage for Islamic Financing

The SAC was referred to on the issue as to whether it is mandatory for an Islamicfinancial institution to offer takaful coverage as the first option in covering a financing received by a customer of the Islamic financial institution.

Resolution

The SAC, in its 41st meeting dated 8 March 2004 and 43rd meeting dated 29April 2004, has resolved the following:

i. For an Islamic financing package which does not include an amount ofcontribution for coverage, the Islamic financial institution shall offer atakaful plan as the first option to the customer who applied for the Islamic financing that requires coverage.72 If the customer refused thetakaful plan on particular reasons, the customer may choose any conventional insurance as he wished. Such an exemption is only given inconsideration of the following factors:

a. If the insurance premium is totally borne by the customer;

b. If there is a sector or specific class in insurance whereby takaful hasno expertise; or

c. The customer’s application was rejected by takaful company on certain grounds.

ii. For an Islamic financing package that includes the amount for contribution of coverage, the Islamic financial institution shall ensure thatonly takaful plan is used to cover such Islamic financing. Conventionalinsurance premium shall not be included in Islamic financing package;and

iii. If a customer who has taken a conventional insurance coverage for anIslamic financing passes away or suffers any kind of peril that results inhis inability to pay for the financing, the Islamic financial institution is entitled to receive compensation from the conventional insurance.

72 The terms “first option“ means the Islamic financial institution will only propose to the customer a takaful coverageand will not propose both takaful and conventional insurance at the same time for the customer’s option.



73 Muslim, Sahih Muslim, Dar al-Mughni, 1998, p. 698, hadith no. 412.

Basis of the Ruling

Ideally, all Islamic financing that require coverage shall be covered by takaful. However, for an Islamic financing package that does not include the amount ofcontribution for coverage, it is justified and reasonable to require the Islamic financial institution to offer takaful as first option to the customer.

The approach in allowing the customer to choose any conventional insurance ashe wishes (in a case where the Islamic financing package does not include theamount for contribution for coverage) has taken into account various factors, including non-Muslim customers, takaful company’s readiness in offering certaintakaful products, takaful company’s expertise in certain class and other factors.This approach is in line with the following hadith of Rasulullah SAW:

“Whenever I order you something, obey it the best as you could and whenever Iforbid you from something, avoid it.”73

In addition, the Islamic financial institution is entitled to receive compensationfrom a conventional insurance company selected by the customer for the settlement of Islamic financing upon death of or perils on the customer. This isbecause the insurance coverage contract and the financing contract are two different contracts. The financing contract involves the Islamic financial institutionand the customer as financing receiver. On the other hand, the insurance coveragecontract involves the customer and the insurance company, whereby the Islamicfinancial institution is the beneficiary.

45. Takaful Coverage for Conventional Loans

In the nation’s dual financial system scenario, there are instances whereby customers who have a loan with a conventional financial institution (for purchaseof a particular asset) wished to get a takaful coverage scheme to cover such asset.

In this regard, the SAC was referred to on the issue as to whether a takaful companymay offer takaful coverage for customer’s asset which is purchased under a conventional loan.

Resolution

The SAC, in its 54th meeting dated 27 October 2005, has resolved that atakaful company may offer a takaful coverage for a customer’s asset eventhough the asset is financed conventionally, provided that it is offered separately and not as a package.

Basis of the Ruling

The aforesaid SAC’s resolution has considered that the takaful coverage contractand the conventional loan contract are two separate and independent contracts.As such, there is no objection for a takaful company to provide takaful coveragefor a customer’s asset which is financed by a conventional loan since the takafulcompany is not directly involved in the conventional loan transaction concluded between the customer and the conventional financial institution.

46. Takaful Coverage for Conventional Credit Card Product

The SAC was referred to a proposal by a takaful company to offer group takafulcoverage for conventional credit card customers. Under this conventional creditcard product, the banking institution will stipulate a condition on the customer toget takaful coverage in the course of application for the conventional credit card.This condition aims to cover the customer in undesirable situations including deathor permanent disability of the customer that disables him from settling his conventional credit card debt.



Resolution

The SAC, in its 70th meeting dated 12 September 2007, has resolved that aspecific takaful coverage for conventional credit card as proposed is not allowed.

Basis of the Ruling

The aforesaid SAC’s resolution has considered that the takaful coverage contractand the conventional credit card contract are interconnected since both contractsare packaged in one product. If the takaful coverage is packaged with the conventional credit card product, this will indirectly cause the takaful business’involvement in practices of riba and other activities forbidden by Shariah (if any).This is clearly in contrary to the basic principles and objectives of takaful as pro vided in the verse of Allah SWT:

“...help one another in furthering virtue and God consciousness, and not in whatis wicked and sinful...” 74

47. Retakaful with Conventional Insurance and Reinsurance Company

A retakaful arrangement is one of the methods for takaful company to mitigateits burden of risks in providing coverage to takaful participants. It refers to sharingof risks between a takaful company and another takaful (and retakaful) companyor insurance (and reinsurance) company. With an effective retakaful arrangement,a takaful company may increase its capacity and stabilise its underwriting performance, as well as able to preserve the takaful fund from a significant financial burden should there be unexpected volume of claims.

Retakaful arrangement is usually conducted via two main methods as follows:

74 Surah al-Ma’idah, verse 2.


i. Inward retakaful whereby the takaful company accepts risks from another takaful (and retakaful) company or other conventional insurance (and reinsurance) company; and

ii. Outward retakaful whereby the takaful company distributes or cedes its underwritten risks to another takaful (and retakaful) company or other conventional insurance (and reinsurance) company.


i. Whether acceptance of inward retakaful by a takaful company on treaty or facultative basis from a conventional insurance (and reinsurance) company ispermissible; and

ii. Whether distribution of risks through outward retakaful to a conventional insurance (and reinsurance) company is permissible.

Resolution

The SAC, in its 47th meeting dated 14 February 2005, has resolved the following:

i. A takaful company is not allowed to accept inward retakaful whether ontreaty or facultative basis from a conventional insurance company andreinsurance company; and

ii. A takaful company is given the flexibility to distribute its risks based onoutward retakaful to conventional insurance company and reinsurancecompany subject to the following conditions:

a. Priority shall be given to a takaful company and retakaful company;

b. Non-existence of a takaful company and retakaful company, either locally or internationally, that is viewed as capable to absorb the distributed risks; and

c. The strength of the takaful company and retakaful company, eitherlocally or internationally, is doubtful.


Basis of the Ruling

The prohibition on a takaful company to accept inward retakaful from a conventional insurance company or reinsurance company has considered the following:

i. The initial contract concluded by a conventional insurance company and areinsurance company is inconsistent with the Shariah.75 If a takaful companyor a retakaful company accept inward retakaful from a conventional insurancecompany or reinsurance company, the takaful company is perceived to recognise the conventional insurance contract which is not Shariah compliant;

ii. Islam does not allow mutual helping and assisting in matters that are forbiddenby Shariah as stated in the following verse of Allah SWT:

“...help one another in furthering virtue and God consciousness, and not inwhat is wicked and sinful...”76

iii. A takaful company shall avoid from any involvement in syubhahmatters whichare practised in the conventional insurance activities.

However, a takaful company is allowed to distribute its risks via outward retakafulto a conventional insurance company and a reinsurance company on the basis ofneeds (hajah), that is, in case there is no takaful company or retakaful companythat is viewed as capable to absorb certain takaful risks. This is in line with thefollowing fiqh maxim:

“Needs take the rule of necessities.” 77

75 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1985, no. 2, v. 2, p. 735.76 Surah al-Ma’idah, verse 2.77 Ahmad al-Zarqa’, Syarh al-Qawaìd al-Fiqhiyyah, Dar al-Qalam, 1989, p. 209. Ibnu Àsyur elaborates that dharuriyyat refers to basic necessities that must be satisfied for a certain community,collectively or individually. If the dharuriyyat has not been fulfilled, the social system of such community will bemalfunctioning. Whereas hajah or hajiyyat refers to matters that are needed by a community for the achievementof its interests/benefits and for a better functioning of its affairs. If such hajiyyat has not been satisfied, the community may still function but not in a proper manner. (Ibnu Àsyur, Maqasid al-Syariàh al-Islamiyyah, Dar al-Nafa’is, 2001, p. 300 – 306).

48. Retakaful Service Fee as Income for Shareholders Fund

Normally, in takaful practice, the retakaful commission received from a retakafulcompany will be credited into the takaful fund. If there is any surplus after deduction of takaful claims and other costs, the surplus will be distributed amongstthe takaful participants and the shareholders fund based on an agreed ratio.

However, a takaful company proposed to treat the retakaful commission as an income of the shareholders fund. The commission will be used to cover the expenses borne by the shareholders in managing retakaful business and as a rewardfor their efforts in obtaining and awarding the business to the retakaful company.

In this regard, the SAC was referred to on the issue as to whether the retakafulcommission may be treated as an income of the shareholders fund.

Resolution

The SAC, in its 4th special meeting dated 29 November 2007, has resolvedthat the proposal to treat retakaful commission (received from a retakafulcompany) as an income of shareholders fund is not allowed.

Basis of the Ruling

Among the duties of a takaful company as mudarib or agent in takaful business isto ensure that takaful risks fund is managed accordingly. One of the methods inmanaging these risks is through retakaful arrangement. Since all retakaful costsand its contribution are taken from participants risk fund and not from shareholdersfund, therefore it is unfair for the takaful company to take the commission of suchretakaful arrangement. This is in line with the following fiqh maxim:

“Liability is (undertaken in equivalent) with reward.” 78

78 Ahmad al-Zarqa’, Syarh al-Qawa`id al-Fiqhiyyah, Dar al-Qalam, 1989, p. 437.


49. Co-Takaful Agreement

A co-takaful agreement is a risk sharing agreement concluded between a takafulcompany and another takaful company, or between a takaful company and aconventional insurance company. In this risk sharing agreement, two or moretakaful companies or conventional insurance companies agree to share the underwritten risks. Nevertheless, separate takaful certificates will be issued by thetakaful company to the takaful participants if the risk sharing is done with a conventional insurance company, and single takaful certificate issued if the risksharing is done amongst takaful companies only.

In this regard, the SAC was referred to on the issue as to whether co-takaful between a takaful company and a conventional insurance company is permissiblein Shariah.

Resolution

The SAC, in its 47th meeting dated 14 February 2005, has resolved that co-takaful between a takaful company and a conventional insurance companyis permissible provided that the execution of the agreement between thecustomer and the takaful company as well as between the customer andthe conventional insurance company are done separately.

Basis of the Ruling

Normally, there must be a distinguishing element when a particular transactioninvolves forbidden and permissible matters so as to avoid mixture of both. Stipulation of the condition “the execution of the agreement between the customer and the takaful company as well as between the customer and the conventional insurance company are done separately” satisfies this requirementas it directly removes syubhah in matters forbidden by Shariah.

This resolution is also consistent with the view of contemporary scholars whichstates that there is no prohibition from Shariah perspective on cooperation between takaful company and conventional insurance company in providing coverage on the condition that the covered portion (by the takaful plan) is managed according to Shariah rulings.79

79 Ali Muhyiddin al-Qurrahdaghi, Al-Ta’min al-Islami: Dirasah Fiqhiyyah Ta’siliyah, Dar al-Basya’ir al-Islamiyyah, 2004,p. 443 - 444.


50. Segregation of Takaful Funds

The SAC was referred to a proposal that requires takaful company to segregatetakaful funds according to types of takaful business, which are, family takaful andgeneral takaful. In addition, takaful funds for investment and risk purposes mustalso be established separately and classified as follows:

i. Participants’ Investment Fund that belongs to the individual participants. Theportion of contribution for investment purpose from the participants will becredited into this fund; and

ii. Participants’ Risk Fund that belongs to takaful participants collectively. The portion of contribution received from the participants based on tabarru` conceptwill be credited into this fund.

Resolution

The SAC, in its 62nd meeting dated 4 October 2006, has resolved that theproposal to segregate takaful funds as outlined above is permissible.

Basis of the Ruling

The segregation of takaful funds according to the types of business is necessarybecause the objectives and risk profile borne by each takaful fund is different. Thissegregation enables the takaful company to identify and determine the management and investment strategies for each takaful fund comparable with therisk profile borne by the takaful fund. The segregation of takaful fund also enablesdistribution of assets, liabilities, incomes and expenses of specific takaful operationto the respective takaful funds. While enhancing good governance for each fund,the segregation also protects the rights of related parties.


51. Imposition of Management Fee on Takaful Participants’ Contribution

The SAC was referred to on the issue as to whether a takaful company may impose management fee on contribution paid by takaful participants to financeoperational expenses of takaful business which mainly consist of managementexpenses and commission.

Resolution

The SAC, in its 62nd meeting dated 4 October 2006, has resolved the following:

i. For takaful model based on wakalah contract, takaful company is allowed to charge management fee on contribution paid by takafulparticipants. The amount of management fee shall consider the responsibilities of takaful company towards takaful participants andshall be agreed upon by the contracting parties. The imposition of management fee shall be clearly stated in takaful agreement contract;and

ii. For takaful model based on mudarabah contract, takaful company isnot allowed to charge any management fee on contribution paid bytakaful participants. On the other hand, all operational expenses shallbe borne by the shareholders fund whereby its income is derived fromits share of investment profits or surplus of the takaful fund.

Basis of the Ruling


i. A wakalah contract is permissible in Shariah, either with imposition of fee orvoluntarily (without fee). Remuneration or fee in a wakalah contract shall beexpressly determined and agreed upon by the contracting parties, either inamount or at a certain ratio. It may be paid at the time of contract or withinthe agreed period of time; and


ii. In a mudarabah contract, the mudarib’s remuneration is his portion as agreedin the profit sharing ratio with the rabbul mal. Thus, the mudarib is not entitledto charge any management fee on the takaful participants’ contributions.

52. Distribution of Surplus from Participants’ Risk Fund

Surplus from participants’ risk fund (based on tabarru`) refers to surplus derivedafter taking into account the provision of certain amount for payment of claims,retakaful, reserves and investment profits. The surplus from participants’ risk fundbelongs to the takaful participants collectively. However, in view of the role playedby the takaful company as the manager of takaful fund, there was a proposal toallow sharing of the surplus from participants’ risk fund between the participantsand the takaful company, depending on the contract between the participants andthe takaful company.

In this regard, the SAC was referred to on the issue as to whether the surplus fromparticipants’ risk fund may be distributed amongst the participants and the takafulcompany.

Resolution

The SAC, in its 42nd meeting dated 25 March 2004 and 59th meeting dated25 May 2006, has resolved that surplus from participants’ risk fund (for family takaful and general takaful plan) may be distributed amongst the participants and the takaful company. However, the method of distributionshall be clearly mentioned and agreed upon by the takaful participants during conclusion of the takaful contract.

The SAC, in its 62nd meeting dated 4 October 2006, has further resolvedthat:

i. For takaful model based on wakalah concept, the risk fund surplus maybe taken by the takaful fund manager as a performance fee based on anagreed percentage; and

ii. For takaful model based on mudarabah concept, the surplus from participants’ risk fund may be shared between the participants and takaful company based on percentage or profit sharing ratio as agreedby all contracting parties.


Basis of the Ruling

The SAC’s resolution that allows the distribution of the surplus from the participants’ risk fund between the participants and takaful company is based onthe fact that the takaful contract generally is formed based on tabarru` andta`awun, as well as the mutual agreement between the contracting parties. Thetabarru` principle is the main underlying principle of the takaful product whereascontracts such as wakalah and mudarabah are applied in the management oftakaful operations.

The SAC’s resolution that allows the distribution of the surplus from the participants’ risk fund between the participants and takaful company for wakalahtakaful model, has considered that the distribution is done as performance feethat may be received by the takaful company. This is in line with the followingfiqh maxim:

“The original ruling for a contract is the consent of the contracting parties and itseffect is based on what have become the rights and duties as agreed in the contract.”80

In addition, takaful companies are different from insurance companies since takaful companies are not insurers but rather managers of takaful funds. Thus,the takaful participants’ consent to share the risk fund surplus with the takafulcompany as the fund manager does not contradict Shariah principles.

53. Distribution of Investment Profit from Participants’ Investment Fundand Participants’ Risk Fund

The SAC was referred to on the issue as to whether a takaful company is allowedto share in or impose a fee or performance fee on the investment profits fromparticipants’ investment fund and participants’ risk fund.



Resolution

The SAC, in its 62nd meeting dated 4 October 2006, has resolved that a takaful company is allowed to share or to impose fee or performance feeon the investment profits from participants’ investment fund and participants’ risk fund subject to the following:

i. For sharing of investment profit from the participants’ investment fund:

a. The investment profits may be distributed to the takaful company onthe basis of profit sharing or management fee of the participants’ investment fund. In order to ensure that the amount in participants’investment fund is sufficient to maintain tabarru` payment, the distributed profit or fee to the takaful company shall be adjusted appropriately.

ii. For sharing of investment profit from participants’ risk fund:

a. For takaful model based on mudarabah, the takaful company is allowed to share the profit whereas for takaful model based onwakalah, the takaful company is allowed to charge a fee or performance fee on the investment profit of the participants’ riskfund. However, the distribution of the investment profit, eitherthrough profit sharing or imposition of fee or performance fee by thetakaful company, may only be done if there is surplus in participants’risk fund after taking into account provision for payment of claims,retakaful and required reserves; and

b. Profit sharing ratio or imposition of performance fee distributed tothe takaful company shall be reasonable and the distribution of theinvestment profit shall be expressly stated in the takaful agreementcontract.


Basis of the Ruling

The aforesaid SAC’s resolution is based on the consideration as mentioned in item52.81

54. Provision of Reserve in Takaful Business

As a prudent measure to protect the interest of participants and the integrity oftakaful system, the SAC was referred to the proposal for the provision of reserveby takaful companies. The need to have the provision of reserve is consistent withthe aim to ensure that the takaful fund is sufficient to meet any of its liability. Thereasonable amount and method for provision of reserve shall be based on the parameter as determined by the regulator and the assigned qualified parties.

Resolution

The SAC, in its 62nd meeting dated 4 October 2006, has resolved that provision of reserve in takaful fund is permissible.

Basis of the Ruling

Islam emphasises on management of life, among others by ensuring orderly economic aspect and Islamic mu`amalah. In line with the objectives of Shariah,provision of reserve in a particular mu`amalah business is a prudent measure toensure sufficiency of the takaful fund in meeting liabilities of the fund. In addition,this allocation is also in line with Shariah that encourages preemptive measuresto encounter any unpredictable future events as stated in the following verse ofAllah SWT:

81 Distribution of Surplus from Participants’ Risk Fund.


The above verses indicate that Shariah recognises and encourages establishmentof a reserve as a preemptive measure to encounter any probabilities in the future.

55. Mechanism to Overcome Deficit in Participants’ Risk Fund

The SAC was referred to ascertain the applicable mechanism to overcome deficitof asset in participants’ risk fund in fulfilling the liabilities of the fund, including thedetermined provision of reserve.

Resolution

The SAC, in its 38th meeting dated 28 August 2003, 46th meeting dated 28October 2004 and 62nd meeting dated 4 October 2006, has resolved the following:

i. Takaful company shall be responsible for any insufficiency of the participants’ risk fund by injecting fund from the shareholders fund onthe basis of qard; and

ii. The takaful company shall make an outright transfer from the shareholders fund to the participants’ risk fund in the event the deficit isstill persistent or due to mismanagement of the participants’ risk fund.

“Yusuf answered: You shall sow for seven consecutive years as usual. But that whichyou reap, leave it in the ear, except a little which you may eat. Then, there shall follow seven hard years (of drought) which will consume all but little of that whichyou have stored (as seeds). Then there will come a year in which the people willhave abundant rain, in which they will press (the grapes, olives and oil).”82

82 Surah Yusuf, verse 47 - 49.


Besides that, the SAC in its 38th meeting dated 28 August 2003 and 100th

meeting on 30 April - 1 May 2010, has resolved that:

i. Utilisation of general takaful fund to cover deficit in family takaful fundor vice versa is not allowed;

ii. Utilisation of participants’ risk fund of a particular family takaful planto cover deficit in another participants’ risk fund of a particular familytakaful plan is permissible, provided that both takaful plans employ thesame method for management and classification of risks; and

iii. Utilisation of participants’ investment fund to cover deficit in participants’ risk fund based on qard is not allowed.

Basis of the Ruling


i. Since the functions, liabilities and risk bearing profile of each fund are different, general takaful fund shall not be utilised to cover deficit in familytakaful fund or vice versa, and risk fund of a particular family takaful plan shallnot be used to cover deficit in another risk fund of a particular family takafulplan of different method for management and classification of risks; and

ii. Participants’ investment fund shall not be utilised as qard to cover deficit inparticipants’ risk fund as the returns to the participants’ account will be adversely affected and it contradicts the objectives of the fund.


In relation to the issue of giving qard and outright transfer from shareholders fund,the SAC’s resolution has considered the following:

i. Qard from shareholders fund is an interest free loan which is in line with Shariahprinciples. As an entity entrusted to manage the takaful operation, it is part ofthe takaful company’s responsibility to give qard in the event of deficit in theparticipants’ risk fund. Application of qard in this context does not contradictthe Shariah principles since it is payable from the participants’ risk fund in thefuture; and

ii. If the other preliminary measures, including qard, are unable to cover the deficitin the participants’ risk fund, an outright transfer would be the final resort. Fromsiyasah syarìyyah perspective, it is a prudent precautionary measure to protectthe interests of the public and takaful industry as a whole. This is in line withthe following fiqh maxims:

“Public interest is given priority over specific interest.”83

“Harm must be removed.”84

83 Al-Syatibi, Al-Muwafaqat fi Usul al-Syariàh, Dar al-Ma`rifah, 1999, v. 2, p. 645.84 Ibnu Nujaim, Al-Ashbah wa al-Naza’ir, Dar al-Kutub al-Ìlmiyyah, 1980, v. 1, p. 85.


56. Hibah in Takaful

Hibah is a Shariah concept applied in takaful products and practised by takafulcompany in various family takaful plans, such as takaful education plan. In thetakaful education plan for instance, a takaful participant will make a hibah of thetakaful benefit to his child to finance the cost of his education in future. Upondeath of the takaful participant, all takaful benefits will become the rights of hisnominated child and will not be distributed amongst the other legal heirs of thedeceased according to faraid. Nevertheless, if the takaful participant is still alivewhen the takaful certificate matures, the benefit will be surrendered to him.

In this regard, the SAC was referred to ascertain the application of hibah in givingthe takaful benefit as mentioned above.

Resolution

The SAC, in its 34th meeting dated 21 April 2003, has resolved the following:

i. The takaful benefit may be made as hibah because the objective oftakaful is to provide coverage for takaful participant. Since the takafulbenefit is the right of takaful participant, the participant is at liberty toexercise his right in accordance with Shariah;

ii. Since the hibah by the participant is a conditional hibah, the status ofthe hibah will not be transformed into a bequest;

iii. Normally, takaful benefit is attached to the death of participant andmaturity of takaful certificate. If the participant is still alive when thetakaful certificate matures, the participant will receive the takaful benefit. However, if the participant passed away before the maturitydate, the hibah will be effective;


iv. Participant is entitled to revoke his hibah which was made before the maturity of takaful certificate, because a conditional hibah will only becompleted after delivery (qabd);

v. Participant is entitled to revoke his hibah which was made to certain individual and deliver the benefit to another person, or terminate his participation in takaful if the nominated recipient passed away beforethe maturity date; and

vi. Takaful nomination form shall clearly mention that the status of nomineeis as beneficiary, if it is intended by the participant as hibah.

Basis of the Ruling

Takaful benefit may be given as hibah ruqba which refers to a conditional gift contingent upon death of one of the parties (either the giver or the recipient ofhibah) as a condition of ownership for the surviving party. In this situation, the hibahproperty will be owned by the recipient upon death of the giver. However, upondeath of the recipient, the hibah property will be returned to the giver.

Some scholars of Hanbali school, Imam Malik, Imam Al-Zuhri, Abu Thur and othersas well as the earlier opinion (qawl qadim) of Imam Syafii view that hibah umra ispermissible and its condition is valid if the giver did not mention that the hibahproperty will be owned by the legal heirs of the recipient upon death of the hibahrecipient.85 Therefore, the hibah property will be returned to the giver upon deathof the recipient. In addition, the implementation of hibah ruqba and umra in takaful industry is also acceptable by some of contemporary scholars.86

In addition, withdrawal of hibah is permissible in the following contexts:

i. hibah with a withdrawal condition;

ii. hibah which is yet to be delivered (qabd);

85 Ibnu Qudamah, Al-Mughni, Dar `Alam al-Kutub, 1997, v. 6, p. 338 - 339.86 Ali Muhyiddin al-Qurrahdaghi, Al-Ta’min al-Islami: Dirasah Fiqhhiyyah Ta’siliyyah, Dar al-Basya’ir al-Islamiyyah, 2004,

p. 244.


iii. hibah that is returned by the legal heirs; and

iv. a father’s hibah to his child.

In the context of takaful, qabd will happen only upon death of the participant ormaturity of the takaful certificate. Therefore, the participant may withdraw hishibah before these two incidents happened. Upon death of the recipient, thehibah contract will be deemed as incomplete since qabd has yet to happen, thus,the participant may withdraw his hibah and make a hibah to another person orterminate the takaful certificate and get the surrender value of the certificate.87

57. Nomination Based on Hibah under Takaful Scheme

The SAC was referred to on the issue as to whether the concept of statutory protection as practised by conventional insurance is applicable in the context oftakaful. In the contract of conventional insurance, nomination of insurance benefitby a policyholder to his/her husband/wife, child, or parents (if the husband/wifeor child had predeceased the policyholder at nomination time) will create a trustfor the benefit of the nominee of the policy moneys and will be statutorily protected under Insurance Act 1996. The provisions relating to this statutory protection stipulate that the payment of insurance benefit will neither form partof the estate of the deceased policyholder nor subject to the deceased’s debt.The policyholder may appoint a trustee for the policy moneys and the receipt ofpolicy moneys by such trustee will release the insurance company from its liability.Without any written consent of the trustee, a policyholder shall not annul,change, surrender or charge the policy if the nominee of the policy is his/her husband/wife, child or parents.

87Majallah al-Ahkam al-`Adliyyah, Matba`ah al-Adabiyyah, 1302H, p. 125, no. 849.


Resolution

The SAC, in its 52nd meeting dated 2 August 2005, has resolved that theconcept of statutory protection as practised by conventional insurance maybe applied in takaful industry in the following manners:

i. Payment of takaful benefit will neither become part of the estate of thedeceased (takaful participant) nor subject to the deceased’s debt;

ii. The takaful participant may appoint a responsible trustee for the takafulbenefit. However, the government-owned trustee will be the trustee forsuch takaful benefit in the following situations:

a. There is no appointed trustee;

b. Nominee is incompetent to enter into a contract; and

c. The parents had predeceased the nominee in the event the nomineeis incompetent to enter into a contract.

iii. Once the trustee received the takaful benefit, the takaful company isdeemed to be released from all liabilities relating to such takaful benefit.

Basis of the Ruling

The aim of takaful benefit is to provide coverage for participant or nominee (hibahrecipient). Since the status of takaful benefit, which is treated as gift (hibah) willneither be a bequest, be a part of the deceased’s estate nor others, the takafulbenefit is identical to the statutory protection as practised by conventional insurance. Hence, any takaful benefit nominated to husband/wife, child or parents(if husband/wife or child had predeceased the policyholder at nomination time)shall not be annulled, changed, surrendered and charged without the consent ofthe nominee.

In addition, since statutory protection protects the interest of the nominee and doesnot contradict the concept of hibah ruqba, this concept may be applied in takafulindustry.


58. Principle of Utmost Good Faith in Takaful

Principle of utmost good faith refers to the obligation of all contracting parties ingiving a complete and true disclosure (duty of disclosure). Under this principle, allcontracting parties are responsible to disclose all relevant information which maypossibly affect the terms of a particular contract.

In the context of conventional insurance, disclosure of relevant information mayaffect premium rate, terms and payment of insurance benefit. In this regard, theduty of disclosure is imposed on both contracting parties, namely, the customerand the insurance company. Generally, an insurance contract will be automaticallyterminated if any of the contracting parties deliberately breached his duty, eitherwith the intention to cheat or defraud.

In this regard, the SAC was referred to on the issue as to whether the principle ofutmost good faith as practised in conventional insurance may be applied in takaful.

Resolution

The SAC, in its 52nd meeting dated 2 August 2005, has resolved that theprinciple of utmost good faith may be applied in takaful industry. If thereis any evidence to indicate fraud on part of the takaful participant, thetakaful company is not required to refund the contribution in participants’risk fund (tabarru` fund) to the takaful participant. However, the amountin the participants’ investment fund shall be returned to the takaful participant since it is the right of the participant.


Basis of the Ruling

The SAC’s resolution is based on consideration that Islam emphasises on honestyin every undertaking, in line with the following saying of Allah SWT:

“O believers! Remain conscious of Allah and be with the truthful.”88

“From Abi Saìd Al-Khudri from Rasulullah SAW who says: An honest trader will be(living) among the prophets, the honest people and the martyrs.”90

According to Majallah al-Ahkam al-Àdliyyah, if one of the parties is proven to havecommitted fraud in a sale contract, the defrauded party is entitled to revoke thesale contract.89

There is also a hadith of Rasulullah SAW which states the following:

From athar of a companion (sahabat):

“From Qatadah, verily Salman had said: An honest trader will be among the sevenwho shall be bestowed under the arash of Allah SWT in the hereafter.”

88 Surah al-Taubah, verse 119.89Majallah al-Ahkam al-Àdliyyah, Matbaàh al-Adabiyyah, 1302H, p. 64, no. 357.90 Al-Naisaburi, Al-Mustadrak àla al-Sahihain, Dar al-Haramain li al-Tibaàh wa al-Nashr wa al-Tawzi`, 1997, v. 2, p. 8.

Based on the above textual provisions, it is understood that all types of agreementor contract is binding on the contracting parties. However, if there is an elementthat denies the validity of a contract from Shariah perspective (such as fraud or others), the contract or agreement is forbidden and void.


59. “Insurable Interest” in Takaful

Insurable interest is a paramount necessity in both conventional insurance andtakaful. Generally, it refers to the relationship or interest between the insuredparty (the policy holder or takaful participant) and the subject matter to be insured, whether it involves life, personal, asset or certain liability. If insurable interest does not exist, the insurance or takaful contract is invalid or unenforceable. Insurable interest is also important in determining the motive andaim of a person purchasing an insurance policy or participating in a takaful plan.

For instance, if a person applied for a life insurance policy or a family takaful planfor himself, and nominated his wife and children as beneficiaries, his applicationis considered to have insurable interest, specifically the interest of his family inthe event of death or permanent disability of the policy holder or takaful participant. Hence, his application is eligible for approval by the insurance or takaful company. On the other hand, if a person applied for a life insurance policyor a family takaful plan for another person, and nominated himself as the beneficiary, his application will not be approved because there is no insurable interest.

In this regard, the SAC was referred to on the concept of insurable interest intakaful.

Resolution

The SAC, in its 52nd meeting dated 2 August 2005 and 76th meeting on 9June 2008, has resolved the following:

i. The concept of insurable interest does not contradict the Shariah andit may be applied in takaful (in takaful, terminologically it is referred toas “permissible takaful interest”);

ii. In general takaful, a person with legal and financial interests in a particular subject is deemed to have permissible takaful interest;


iii. For family takaful, the permissible takaful interest exists whenever thereis a clear relationship between two parties that involves the elements ofaffection, emotional interdependence, and reasonable expectation of lossin terms of material or psychological. In this situation, a person is deemedas having permissible takaful interest on his spouse, children, employees(for an employer) and any other individual who is dependent on him inany way permissible in Shariah;

iv. When concluding a takaful contract that involves a third party who is ofpermissible takaful interest, the participant or certificate holder shall obtain the consent of the third party, unless the third party is a child ofminor age;

v. As a general principle, permissible takaful interest shall exist at the timethe contract is concluded and at the time of incident or takaful benefit ismade. The permissible takaful interest is considered as no longer in existence if a particular relationship with the third party has ended duringthe in force period of the takaful certificate. Therefore, upon death ofthe third party, the participant or certificate holder is not entitled to receive the takaful benefit as beneficiary.

Nevertheless, if a marital relationship has ended by a divorce during thein force period of the takaful certificate, the permissible takaful interestis still considered as continuously in force. Hence, unless the covered partyhas clearly refused to give his consent, the participant or certificate holderis allowed to receive takaful benefit (either as beneficiary or wasi) upondeath of the covered party.

In addition, the covered party is entitled to the disability benefit (includingcritical illness coverage) in the event of permanent disability of the covered party. If the takaful certificate involves investment or savings element, the participant or certificate holder would also be entitled tothe value of the saving or investment on the maturity date of the takafulcertificate; and


vi. In preserving the interest of the takaful participants as well as the thirdparty, the takaful company has the right to deny any application to participate in a takaful scheme if no permissible takaful interest was established, or to deny any claim of benefit if there was any evidenceindicating bad intention on part of the participant or certificate holder.

Basis of the Ruling

Even though the concept was initially introduced in conventional insurance toavoid elements of wagering and gambling, this concept is also consistent withfundamental features of takaful. Under the concept of tabarru`, takaful participants mutually agree to guarantee each other from any form of risks acceptable in Shariah by commitment to give contribution. However, such flexibility may lead to moral hazard or manipulation of the takaful contract fornon-Shariah compliant purpose. In line with the Shariah principle known as saddzarai` (blocking the means that may lead to harmful result), the concept of permissible takaful interest is viewed as a mechanism to avoid such moral hazardor manipulation.


Tawarruq refers to a mu`amalah with two stages of transactions. At the first stage,the buyer will purchase an asset on credit from the original seller, and at the secondstage, the buyer will then sell the asset on cash basis to a third party.91 It is namedas tawarruq because the buyer purchased the asset on credit with no intention ofutilising or benefiting from it, rather to sell it to obtain cash. Tawarruq, which isalso known as commodity murabahah, is widely used in deposit products, financing, asset and liability management as well as risk management.

60. Deposit Product Based on Tawarruq

An Islamic financial institution proposed to offer deposit product based on tawarruqor commodity murabahah. The proposed mechanism of the commodity murabahahdeposit is as follows:

i. The customer (depositor) appoints the Islamic financial institution as an agentto purchase metal commodity from metal trader A on cash basis in a recognisedmetal commodity market;

ii. The Islamic financial institution will thereafter purchase the metal commodityfrom the customer on a deferred sale at a cost price plus profit margin; and

iii. Next, the Islamic financial institution will sell back the metal commodity to metaltrader B on cash basis in the metal commodity market.

As a result of the transaction (ii) above, the Islamic financial institution will assumeliability (the cost price of the commodity plus profit margin) to be paid to the customer on maturity. The purchase price of commodity from metal trader A andthe sale price of commodity to metal trader B are of the same amount.

In this regard, the SAC was referred to on the issue as to whether the deposit product based on tawarruq is permissible.

TAWARRUQ

91 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 14, p. 147.



“...whereas Allah has permitted trading and forbidden riba usury...”92

Based on general meaning of the above verse, scholars are of the view thattawarruq is allowed since it is a kind of trading activity. It may be conductedfor the purpose of obtaining cash, with either the purpose is known by all related parties or not. It may also be conducted due to pressing need or as acommon practice of certain parties or institutions.

ii. Fiqh maxim:

“According to the original method of ruling, muàmalah is permissible, exceptwhen there is a provision prohibiting it.”93

iii. Contemporary scholars allow the application of tawarruq based on the viewsof Hanafi, Hanbali and Syafii schools that permit the application of tawarruq.94

Resolution

The SAC, in its 51st meeting dated 28 July 2005, has resolved that depositproduct based on tawarruq is permissible.

Basis of the Ruling

The aforesaid resolution is based on the following textual provisions and viewsrelating to permissibility of tawarruq:

i. Allah SWT says:

92 Surah al-Baqarah, verse 275.93 Al-Syafii, Al-Umm, Bait al-Afkar al-Dawliyyah, (n.d.), p. 438.94 Ibnu al-Humam, Syarh Fath al-Qadir, Dar al-Kutub al-Ìlmiyah, 2003, v. 7, p. 199; Ibnu Muflih, Al-Furu`, Bait al-Afkar al-Dawliyyah, 2004, p. 931; whereas Syafii scholars’ view is taken from the permissibility of bai` ìnah.

61. Financing Product Based on Tawarruq

An Islamic financial institution proposed to offer financing product based on theconcept of tawarruq or commodity murabahah. The proposed mechanism of thecommodity murabahah financing is as follows:

i. The Islamic financial institution purchases metal commodity from metal traderA on cash basis in a recognised metal commodity market;

ii. The Islamic financial institution sells the metal commodity to the customer oncredit basis at a cost price plus profit margin; and

iii. The customer appoints the Islamic financial institution as his agent to sell themetal commodity to metal trader B on cash basis in the metal commodity market.

The cash sale by the customer to metal trader B will enable the customer to obtaincash for financing, while the deferred credit sale from the Islamic financial institutionto the customer will create a financial obligation that must be paid by the customerwithin an agreed term.

In this regard, the SAC was referred to on the issue as to whether the financingproduct based on the concept of tawarruq is permissible.

Resolution

The SAC, in its 51st meeting dated 28 July 2005, has resolved that financingproduct based on the concept of tawarruq is permissible.

Basis of the Ruling

The aforesaid resolution is based on the textual provisions and views on permissibility of tawarruq as mentioned in item 60.95

95 Deposit Product Based on Tawarruq.



62. Sukuk Ijarah and Shariah Compliant Shares as Underlying Assetin Tawarruq Transaction

There was a proposal by an Islamic financial institution to use sukuk ijarah andShariah compliant shares as underlying asset in tawarruq or commodity murabahah transaction to manage liquidity in Islamic financial system. The featureof proposed sukuk ijarah is sukuk ijarah which is backed by tangible asset, financial asset and a combination of both tangible asset and financial asset. Thefeature of Shariah compliant shares is that the shares comply with the Shariahprinciples and rulings.

In this regard, the SAC was referred to on the issue as to whether the applicationof sukuk ijarah and Shariah compliant shares as the underlying assets in tawarruqtransaction is permissible in Shariah.

Resolution

The SAC, in its 58th meeting dated 27 April 2006, has resolved that theapplication of sukuk ijarah and Shariah compliant shares as the underlyingasset in tawarruq or commodity murabahah transaction to manage liquidity in Islamic financial system is permissible. The sukuk ijarah shall bebacked by tangible asset or a combination of tangible asset and financialasset.

Basis of the Ruling


i. The proposed underlying assets consist of permissible and tradable assets inaccordance with Shariah perspective; and

ii. The sale transaction based on tawarruq normally involves a deferred sale byone of the contracting parties. In this case, the tawarruq transaction must involve sale of tangible asset or securities that are backed by tangible asset orcombination of tangible asset and financial asset in order to avoid sale of debtwith debt which is forbidden in Shariah.

63. Application of Tawarruq in Sukuk Commodity Murabahah

There was a proposal to issue sukuk commodity murabahah based on tawarruq asan alternative instrument to existing money market products which are based onthe concept of bai` `inah. Generally, the method of issuance of this sukuk involvescommodity murabahah transaction through tawarruq contract to create indebtedness between the sukuk issuer and investors. The debt will be settled bythe sukuk issuer on maturity date. This sukuk will be tradable in the secondary market for financial institutions that apply the concept of bai` dayn.

In this regard, the SAC was referred to on the issue as to whether the proposal toissue sukuk based on tawarruq complies with Shariah.

Resolution

The SAC, in its 67th meeting dated 3 May 2007, has resolved that there isno objection in Shariah for the issuance of sukuk commodity murabahahbased on tawarruq as long as the sale transactions involve three or morecontracting parties.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the textual provisions and views on thepermissibility of tawarruq as mentioned in item 60.96

96 Deposit Product Based on Tawarruq.



64. Proposed Operational Model of Commodity Murabahah House(Now Known as Suq al-Sila`)

Bank Negara Malaysia, Securities Commission, Bursa Malaysia and Islamic financialindustry players had collaboratively introduced a fully electronic web-basedShariah commodity trading platform known as Commodity Murabahah House(CMH). As an international commodity platform, CMH facilitates commodity-based Islamic investment trading and financing under the principles of tawarruq,murabahah and/or musawamah. As a start, crude palm oil (CPO) with clear specification is traded at CMH in ringgit. CMH also offers trading in various foreign currencies to provide wider range of options, access and flexibility for international financial institutions to participate in Shariah commodity tradingmarket.

In the proposed structure of CMH, the seller is required to own the CPO prior toany sale transaction. CMH allows the buyer to receive delivery of the commodityif buying position is above commodity sale and trading accounts are not squaredoff on the same day. Prior to delivery, the CPO buyer must first obtain a licensefrom the Malaysian Palm Oil Board and will be charged delivery fee determinedby the CMH as well as other costs related to delivery and storage.

In this regard, the SAC was referred to on the issue as to whether the proposedimplementation of CMH is in line with Shariah.


97 In Malay language, the word ‘randomly’ is referred to as ‘rawak’ which has been defined by Kamus Dewan (the 4th

Edition, 2007) as ‘rambang atau tidak ditentukan atau diatur terlebih dahulu’. It means ‘unspecified or has not beenpredetermined or prearranged’. Thus, “randomly” in CMH operational context, aims to ensure that the transactedasset is not required to be resold to the original supplier.

Resolution

The SAC in its 78th meeting dated 30 July 2008, has resolved that the proposed operational structure of CMH is permissible on the condition thatthe traded CPO shall be identifiable and precisely determinable (mu`ayyanbi al-zat) in terms of its location, quantity and quality in order to meet thefeatures of a real transaction. In addition, it is also recommended that thetransaction shall be executed randomly97 so that the CMH operation is ableto better meet the original features of tawarruq.

Basis of the Ruling

The use of CPO as the underlying asset is viewed as fulfilling the requirements ofsubject matter of a sale transaction because it exists and is physically identifiable,is able to be received before sale, and its quality is determinable based on the givenspecifications in terms of its essence, standard and value. In addition, the tradedCPO is deliverable to the buyer and is free from any binding terms.

Wadiàh contract is a mechanism that enables a person to entrust his asset to another person for the purpose of safe keeping. In the current practices of Islamicbanking, wadiàh yad dhamanah (safe keeping with guarantee) is a form ofwadiàh which is widely applicable. Under the wadiàh yad dhamanah contract,the Islamic banking institution acts as the safe keeper or trustee for the fund deposited by customer of the Islamic banking institution. However, as the customer normally allows the Islamic banking institution to utilise his depositedmoney, the Islamic banking institution is obliged to guarantee the deposit. As areward and token of appreciation for the utilisation of the deposit, the Islamicbanking institution, at its discretion, may give hibah to the customer.

65. Adaptation (Takyif) of Wadiàh Yad Dhamanah as Qard

The SAC was referred to on the issue as to whether the ruling applicable on qardmay also be adapted or applied in wadiàh yad dhamanah.

Resolution

The SAC, in its 6th special meeting dated 8 May 2008, has resolved thatthe ruling on wadiàh yad dhamanahwhich involves money may also applythe rules of qard in terms of its parameters (dhawabit) and its subsequenteffects.

Basis of the Ruling


i. In the current financial context, wadiàh is a contract whereby the asset ownerdeposits his asset to another party on trust basis for safe keeping; 98

WADIÀH



ii. Majority of fiqh scholars classify wadiàh as a trust contract (yad amanah)whereby the deposited asset for the custody of the wadiàh recipient is treatedas a trust. The wadiàh recipient is obliged to replace the wadiàh asset withinhis custody in the event of damage or loss of the wadiàh asset due to his negligence.99 Nevertheless, majority of scholars view that if the financial institution utilised the deposited money, the contract becomes a contract ofqard;100

iii. The OIC Fiqh Academy has resolved that “deposits in current accounts, eitherdeposited at Islamic or conventional financial institution, is a kind of loan fromfiqh perspective since the financial institution that receives the deposit guarantees such deposit and it must refund the deposit upon request”;101 and

iv. The contemporary scholars’ view in relation to the rules on wadiàh asset deposited at Islamic financial institutions is consistent with the view of classicalscholars who held that the rulings of qard are applicable in the instance wherethe wadiàh recipient utilised wadiàh asset with the consent of wadiàh depositor.

99 Al-Baihaqi, Al-Sunan al-Kubra, Dar al-Kutub al-Ìlmiyah, 2003, v. 6, p. 473.100 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1996, no. 9, v. 1, p. 667, v. 7, p. 198.101 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1995, 9th Convention, resolution no. 86 (9/3).


Wakalah is an agency contract in which a party mandates another party as hisagent to perform a particular task. In the current context of Islamic finance, thecustomer normally appoints a financial institution as his agent to conduct a particular mu`amalah transaction and in return, the financial institution will receivea fee for the service.

66. Application of Wakalah bi al-Istithmar in Deposit Product

An Islamic financial institution would like to introduce a deposit product basedon wakalah bi al-istithmar (investment agency). Under this product, a customerwill deposit a certain amount of money at the Islamic financial institution withthe condition that such deposit shall only be invested in an instrument with thepotential to generate return at a certain minimum rate (for instance 5% perannum). The Islamic financial institution will act as an agent in investing the customer’s deposit and will be entitled to a fee as agreed by both parties.

However, the Islamic financial institution will not guarantee that the customer willbe getting at least the minimum investment profit rate as expected. Any loss willsolely be borne by the customer unless it is proven that the Islamic financial institution had been negligent or had breached the terms of agreement by investing in an instrument which has no potential to generate the minimum profitof 5% per annum. In addition, if the customer decides to terminate the investment contract earlier and withdraw all of his deposit, he is only entitled toreceive the current value of the investment.

In this regard, the SAC was referred to on the issue as to whether the proposeddeposit product which is based on wakalah bi al-istithmar is permissible.

WAKALAH 103SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

Resolution

The SAC, in its 2nd special meeting dated 18 June 2007, has resolved thatthe proposed deposit account which is based on wakalah bi al-istithmar contract is permissible, subject to the following conditions:

i. If the Islamic financial institution has breached any terms of agreementor has negligently invested in an instrument which has no potential togenerate profit at the minimum rate (for example 5% per annum), theIslamic financial institution will have to pay compensation as much as theprincipal sum of investment plus the actual profit (if any); and

ii. If the Islamic financial institution invested in an instrument that is expected to generate profit at the rate of at least 5% per annum butfailed to reach the targeted rate due to problems which are not attributable to the negligent conduct of the Islamic financial institution,such loss shall be borne fully by the customer.

Basis of the Ruling

Principles of wakalah bi al-istithmar are identical to principles of mudarabah because the agent receives the deposit money from the customer for the purposeof investment. However, wakalah is based on ujrah or commission. The applicationof wakalah principles in this form is not contrary to the objectives of Shariah aslong as the original features of wakalah are being preserved. This is in line with thepermissibility of wakalah as stated in al-Quran:

“...let one of you go to the city with this silver coin and find food that is purest andlawful (that is sold there). Let him bring you provision from it...”102

102 Surah al-Kahfi, verse 19.


The permissibility of wakalah has also been mentioned by Rasulullah SAW as in thefollowing hadith:

“From Ùqbah ibn Àmir told that Rasulullah SAW gave him a few goats to be distributed amongst his companions and one male goat was left after the distribution. He informed Rasulullah SAW about it, and then he said: Slaughter iton my behalf.”103

“(Dealing of) Muslims is based on conditions (as agreed) amongst them, exceptconditions that permit a forbidden matter or forbid a permissible matter.”104

Based on these hadith, the customer is entitled to instruct the Islamic financialinstitution who acts as his agent, to invest in a particular instrument that potentially generate a minimum profit. Therefore, if the customer decides to terminate the investment contract and withdraw all the deposited amount, thecustomer is deemed as withdrawing the mandate to manage capital from the Islamic financial institution. In this situation, the customer will only be entitled tothe current investment value. This is viewed to be consistent with the consensualviews of all four schools relating to investment contracts such as mudarabah,whereby all schools agree that a mudarabah contract is annulled or terminatedby an expressed statement of termination, or by the conduct of the capitalprovider in withdrawing the mandate to manage the capital.105

103 Al-Bukhari, Sahih al-Bukhari, Al-Matbaàh al-Salafiyyah, 1982, v. 2, p. 207, hadith no. 2500.104 Abu Daud, Sunan Abi Daud, Bait al-Afkar al-Dawliyyah, 1999, p. 398, hadith no. 3594.105 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 5, p. 3965.


Bai` dayn refers to a contract of debt trading created from Shariah compliant business activities. In the context of Islamic finance, bai` dayn is a method of saleof debt created under exchange contracts such as murabahah, bai` bithaman ajil,ijarah, istisna` and others.

67. Repurchase of Negotiable Islamic Debt Certificate

Negotiable Islamic Debt Certificate (NIDC) is a debt certificate that is structured basedon the concept of bai` `inah. Under the NIDC mechanism, the Islamic financial institution will sell its asset to the customer on a cash basis. Subsequently, the institution will repurchase the asset on credit at a higher purchase price. The differencebetween the sale price and the purchase price is the amount of profit gained by thecustomer.

As evidence of indebtedness to the customers of the Islamic financial institution, theIslamic financial institution will issue NIDC which is tradable at the secondary market.Upon maturity, the NIDC holder will surrender the NIDC to the Islamic financial institution and receive its nominal value (the Islamic financial institution’s purchaseprice).


i. Whether the Islamic financial institution may repurchase the NIDC which it hasissued before the maturity period; and

ii. The suitable method of pricing for the repurchase of the NIDC by the Islamic financial institution.

Resolution

The SAC, in its 14th meeting dated 8 June 2000, has resolved the following:

i. The Islamic financial institution that issued the NIDC may repurchase theNIDC before maturity, provided that the NIDC shall be terminated; and

ii. The price (including profit) of the NIDC which is traded before the maturity date shall be determined according to the agreement betweenthe seller and the buyer.

BAI` DAYN SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE106


Basis of the Ruling

In general, the NIDC is a debt certificate (syahadah al-dayn) which is a valuableand tradable asset in the market according to the needs of and agreement between the certificate holder and the buyer. Debt trading is allowed with thecondition that the debt is clearly in existence. In the context of NIDC, the sale ofdebt is permissible because it is conducted between the Islamic financial institutionand the certificate holder.

In this regard, many fiqh schools have granted flexibility in debt trading betweenthe creditor and the debtor. Majority of scholars among the Hanafi, Maliki, Syafiiand Hanbali schools allow debt trading to the debtor because there is no issue ofnon-delivery of object of the contract as the sold debt is already in the possessionof the creditor.106

In addition, the determination of price in a sale is based on the agreement andmutual consent of the seller and the buyer. Since NIDC is a debt certificate whichis negotiable according to Shariah, the price of the certificate depends on whathas been agreed by the contracting parties.

68. Sale of Debt Arising from Services

Under a service agreement (for example, cleaning services of a building) concludedbetween a service company (customer) and another company (third party), thethird party is responsible to settle the payment for the service to be rendered bythe customer. The customer then sells such debt obligation of the third party tothe Islamic financial institution using a debt undertaking letter. The sale of suchdebt from a service to be rendered is aimed at obtaining funds from the Islamic financial institution to finance the service costs to be incurred by the customer.

In this regard, the SAC was referred to on the issue as to whether the proposedsale of debt arising from a service between the customer and the Islamic financialinstitution is permissible.


Resolution

The SAC, in its 17th meeting dated 12 February 2001, has resolved that theproposed sale of debt arising from a service is not allowed.

Basis of the Ruling

In the concept of bai` dayn, the debt must be in existence or known before it canbe traded. Majority of scholars view that a tradable debt is a debt which is clearlyestablished and fixed (dayn mustaqir).107 Otherwise, the sale is void.

According to Al-Syirazi:

“Debts shall be scrutinised, if the ownership of the debts is fixed, such as compensation for damage and repayment of a loan, then the sale of such debts tothe rightful person (debtor) before the payment is received is allowed, because hisownership of these debts is established. Therefore, the debts may be sold just likea sale of any purchased item which is already in the possession of the buyer. Is it(sale of debt) permissible to another person other than himself (the debtor)? Thereare two opinions: First, it is permissible since whatever is allowed to be sold to therightful person (debtor) is also allowed to be sold to other person, like wadi`ah (deposit for safe keeping). Second, it is not permissible because he (the seller) isnot able to deliver it (to the buyer) as he (the debtor) may object to or deny it (thedebt). That is considered as unnecessary gharar (for the buyer), thus, it is not permissible. However, the first opinion is clearer, because he (the seller) in principleis able to deliver the debt without any objection or denial (over the debt).”108

Based on the aforesaid argument, sale and purchase of a debt created from a service as presented above is not allowed because it does not satisfy the contractof bai` dayn that requires an established and fixed existence of debt. An expecteddebt created from a service to be rendered by the customer is actually the projectedincome that entails the issue of uncertainty (gharar) in the transaction conducted.

107 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh, Dar al-Fikr, 2002, v. 5, p. 3406 - 3407.108 Al-Syirazi, Al-Muhazzab fi Fiqh al-Imam al-Syafii, Dar al-Qalam, 1996, v. 3, p. 31:


Bai` ìnah refers to a contract which involves sale and buy back transactions of anasset by the seller. In these transactions, the seller sells an asset to the buyer oncash basis and then buys back the asset at a deferred price which is higher thanthe cash sale price. It may also be conducted where the seller sells the asset tothe buyer at a deferred price and subsequently buys back the asset on cash basisat a lower price than the deferred sale price. Bai` ìnah concept is used in theMalaysian Islamic banking and Islamic capital market system to fulfill the variousneeds of market players, mainly during the initial development stage of the Islamicfinancial system.

69. Application of Bai` Ìnah in Issuance of Negotiable Islamic Debt Certificate

The SAC was referred to on a proposal to issue Negotiable Islamic Debt Certificate(NIDC) based on bai` ìnah concept. Under the NIDC mechanism, the Islamic financial institution will sell its asset to the customer on cash basis. Subsequently,the Islamic financial institution will buy back the asset on credit at a higher purchase price. The difference between the sale price and the purchase price isthe amount of profit gained by the customer.

In this regard, the SAC was referred to on the issue as to whether the issuance ofNIDC as proposed is permissible.

Resolution

The SAC, in its first meeting dated 8 July 1997, has resolved that the issuance of NIDC based on bai` ìnah concept is permissible.

Basis of the Ruling

The SAC’s resolution is based on the following evidences on the permissibility ofbai` ìnah:

BAI` ÌNAH 109SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

i. Allah SWT says:

“...whereas Allah SWT has permitted trading and forbidden usury...”109

Two sales contracts concluded separately and independently, with no interrelation with one another and using the pronunciation of offer and acceptance in accordance with Shariah are the important elements in bai` ìnahtransactions, which are consistent with the requirements of the above verse.Therefore, the two sales agreements between the seller and the buyer in bai` ìnah transactions are valid in Shariah, based on the above elements.

ii. Some scholars of the Syafii school and a few from the Hanafi school, such asImam Abu Yusuf are of the view that bai` ìnah is permissible.110

iii. Imam Syafii explained on the permissibility of bai` ìnah in his book, al-Umm, asfollows:

“When a person sold an asset in a certain period and the buyer received it, thenthere is nothing wrong if he buys back the asset from the one who bought theasset from him at a lower price.”111

iv. Imam Subki quoted the saying of Imam Syafii as follows:

“When a person sold an asset in a certain period and the buyer received it, thenthere is nothing wrong if he buys back the asset from the one who bought itfrom him at a lower or higher price, either on credit or cash basis, because it isa different sale from the first sale.” 112

109 Surah al-Baqarah, verse 275.110 Al-Fatawa al-Hindiyyah, Matbaàh Amiriyah, 1310H, v. 3, p. 208.111 Al-Syafii, Al-Umm, Bait al-Afkar al-Dawliyyah, (n.d.), p. 461.112 Al-Subki, Takmilah al-Majmu` Syarh al-Muhazzab, Maktabah al-Irshad, 1995, v. 10, p. 141:


70. Application of Bai` Ìnah in Islamic Interbank Money Market

There was a proposal to introduce a transaction based on bai` ìnah in the Islamicinterbank money market. In this transaction, an amount of Shariah compliantasset will be sold by a financier (for example, a central bank) to the receiving financial institution at X price on credit. Subsequently, the receiving financial institution will sell back the asset to the financier on cash basis at Y price. The Xprice is higher than the Y price, and the difference between the two is the profitto the financier. Both sales contracts are executed separately.

In this regard, the SAC was referred to on the issue as to whether the transactionbased on bai` ìnah in the Islamic interbank money market is permissible.

Resolution

The SAC, in its 8th meeting dated 12 December 1998, has resolved thatthe transaction based on bai` ìnah in the Islamic interbank money marketis permissible, subject to the following conditions:

i. Bai` ìnah transaction shall follow the methods acceptable by Syafiischool; and

ii. The transacted goods shall be non-ribawi items.

Basis of the Ruling

This SAC’s resolution is based on the evidences on permissibility of bai` ìnah asmentioned in item 69.113

113 Application of Bai` Ìnah in Issuance of Negotiable Islamic Debt Certificate.


71. Application of “Sale and Buy Back” Contract

“Sale and buy back” contract involves a sale contract between two contracting parties followed by a promise (wa`d) by the original seller to buy back the asset ona different date if the buyer decided to sell the asset to the original seller. The pricein the second contract is different from the price in the first contract. The emphasisgiven in the second contract is the promise by the original seller to buy back theasset from the buyer based on agreed terms and conditions.

In this regard, the SAC was referred to on the issue as to whether the aforesaid“sale and buy back” contract is permissible and whether it is similar to bai` ìnah.

Resolution

The SAC, in its 13th meeting dated 10 April 2000 and 21st meeting dated 30January 2002, has resolved that the “sale and buy back” contract on different dates is permissible and it is not a bai` ìnah contract.

Basis of the Ruling

“Sale and buy back” contract is a conditional sale contract allowed in Shariah andit is not bai` ìnah since the second contract will only be concluded if the buyer decides to sell the asset to the original owner. The conditional sale contract is certified as a valid contract because the stipulated condition does not affect theobjective of the first contract and there is a valid transfer of ownership of the asset.


72. Conditions for Validity of Bai` Ìnah Contract

In order to standardise the application of bai` ̀ inah in the Islamic financial industry,the SAC was referred to on the conditions for the validity of bai` ìnah contract.

Resolution

The SAC, in its 16th meeting dated 11 November 2000 and 82nd meetingdated 17 February 2009, has resolved that a valid bai` ìnah contract shallfulfill the following conditions:

i. Consisting of two clear and separate contracts, namely, a purchase contract and a sale contract;

ii. No stipulated condition in the contract to repurchase the asset;

iii. Both contracts are concluded at different times;

iv. The sequence of each contract is correct, whereby, the first sale contractshall be completely executed before the conclusion of the second salecontract; and

v. Transfer of ownership of the asset and a valid possession (qabd) of theasset in accordance with Shariah and current business practice (ùrf tijari).

Basis of the Ruling

The detailed conditions for the validity of bai` ìnah contract are based on the arguments as mentioned in item 69.114

In addition, there shall be transfer of ownership of the asset because one of therequirements for a valid sale contract is qabd of the purchased asset before it issold to others or the original seller. This is intended to avoid any issue on sale ofasset which is yet to be owned.

114 Application of Bai` Ìnah in Issuance of Negotiable Islamic Debt Certificate.


73. Stipulation to Repurchase Asset in Bai` Ìnah Contract

The SAC was referred to on the issue as to whether stipulation to repurchase asset(interconditionality) may be incorporated into both agreements of bai` bithamanajil (BBA) based on bai` ìnah, namely, the Property Purchase Agreement and theProperty Sale Agreement for home financing concluded between the Islamic financial institution and the customer. This stipulation to repurchase is normally included in the document that indicates the seller’s undertaking to repurchase theasset from the buyer especially in the recital of the agreement, marketing brochures,supplementary documents, appendixes and others.

Resolution

The SAC, in its 82nd meeting dated 17 February 2009, has resolved that thestipulation to repurchase the asset in bai` ìnah contract will render the contract as void.

Basis of the Ruling

This resolution is based on the opinion of majority of scholars which states that theincorporation of a condition to repurchase the asset in a bai` ìnah contract willannul the contract:

i. Al-Nawawi stated that scholars unanimously view that stipulation to repurchaselinked to another contract annuls the contract;115

ii. In Hasyiyah al-Sawi ̀ ala Syarh al-Saghir, there is a view stating that the offer andacceptance (sighah) in a bai` ìnah contract which represent interconnection orinterrelation between the two sales contracts will adversely affect such salescontracts;116 and

iii. Dr. Yusof Al-Qaradawi in his response to the sale of slave by Ummu Walad Zaidbin Arqam117 stated that such bai` ̀ inah is allowed if there is no pre-arrangement(tawatu’) to repurchase the slave and it does not amount to riba.118

115 Al-Nawawi, Al-Majmu` Syarh al-Muhazzab, Dar al-Fikr, 1996, v. 10, p. 128.116 Al-Sawi, Hasyiyah al-Sawi àla Syarh al-Saghir, Dar al-Maàrif, 1982, v. 6, p. 395 – 396.117 Al-Daraqutni, Sunan al-Daraqutni, Dar al-Ma`rifah, 1966, v. 3, p. 52, hadith no. 212.118 Al-Qaradawi, Bai` al-Murabahah li al- Amir bi al-Syira’, Maktabah Wahbah, 1995, p. 43.



PART II: SUPPORTING SHARIAH CONCEPTS

Hibah means transfer of ownership of an asset to a person without any consideration in return.119 It is a unilateral contract and also a benevolent act. Basically, hibah is commendable. In the Islamic financial system, an Islamic bankinginstitution normally applies the hibah concept to reward wadi`ah and qard depositors. In certain cases, there are also instances of giving hibah to customers,such as hibah to customers who conduct timely payments as scheduled. In thetakaful industry, application of the hibah concept is used in several family takafulproducts in which participants may give hibah in the form of assigning the takafulbenefit to the nominee or recipient of hibah.

74. Hibah in Interbank Mudarabah Investment Contract

Interbank Mudarabah Investment is one of the investment transactions amongstparticipants in the Islamic Interbank money market which is conducted based onmudarabah principles. The rate of return for the investor financial institution isdetermined based on the rate of return of the investee financial institution (orknown as ‘r’ rate). The ‘r’ rate represents the efficiency of a financial institutionin managing its Islamic funds or assets. This indicates that an efficient financialinstitution normally has a higher ‘r’ rate as compared to a less efficient financialinstitution. If the ‘r’ rate of the investee financial institution is low, it will offer alow return to the investor financial institution. Problems arise when the ‘r’ rate ofsome Islamic financial institutions is too low than the market ‘r’ rate that makesit difficult for the financial institutions to obtain funding from the market.

In order to address this problem, there was a proposal to introduce the hibah concept as one of the market practices in the Interbank Mudarabah Investmentcontract. Under this concept, the investee financial institution with lower ‘r’ ratethan the market ‘r’ rate will offer hibah as a consolation gift to the investor financial institution who is willing to invest with the former. Hibah is payable basedon a certain percentage of the ‘r’ rate of the investee financial institution, subjectto its affordability.

119 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 42, p. 120.

HIBAH 117SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

In this regard, the SAC was referred to on the issue as to whether the investee financial institution may give hibah to the investor financial institution in a mudarabah contract such as the Interbank Mudarabah Investment contract in orderto give a competitive return in the market.

Resolution

The SAC, in its 8th meeting dated 12 December 1998, has resolved that thepractice of giving hibah by the investee financial institution to the investorfinancial institution that amounts to a guaranteed profit (‘r’ rate) in InterbankMudarabah Investment contract is not allowed.

Basis of the Ruling

The practice of giving hibah in a contract based on mudarabah is not allowed because mudarabah is based on profit sharing. If the practice of offering hibah isallowed, it may adversely affect the nature of the mudarabah contract since themudarib is deemed as guaranteeing the mudarabah profit. Besides, the practice ofgiving hibah is also contradictory to the objective of mudarabah contract since itdenies the elements of profit sharing and loss bearing (if any) by the rabbul mal.

75. Application of Hibah in the Contract of al-Ijarah thumma al-Bai`

An Islamic financial institution would like to offer hibah in al-ijarah thumma al-bai`(AITAB) as an incentive and encouragement to customers to timely observe theirmonthly payment of rent according to the prescribed schedule. In the proposedarrangement, hibah will be given to customers who pay their monthly rents in thefirst year without any late payment. The proposed hibah rate is 1% of the financingamount which will be directly credited into the account of eligible customers onthe 13th month. However, customers who settle all his debts and terminate theirAITAB contract within the first 12 months are not eligible to receive such hibah.


“...but if they choose of their own accord to make over to you a part of it, thenyou may enjoy it with pleasure and good cheer.”120

“Abu Abdullah al-Hafiz has reported to us, he said, I heard that Abu Zakaria Yahyabin Muhammad al-`Anbari said, I heard that Abu Abdullah al-Busyanji said, aboutthe saying of the Prophet Muhammad SAW: Exchange gifts (among you) and youwill love each other.”121

Besides that, there is no impediment in Shariah to apply the concept of hibah inAITAB contract since hibah is a benevolent act and is at the discretion of the giverof hibah.

In this regard, the SAC was referred to on the issue as to whether the applicationof the concept of hibah in AITAB as proposed is permissible.

Resolution

The SAC, in its 13th meeting dated 10 April 2000, has resolved that givinghibah in an AITAB contract as an incentive to the customer who pays onschedule as proposed is permissible.

Basis of the Ruling

Giving hibah and gift is highly recommended as suggested in the following verseof al-Quran and hadith of Rasulullah SAW:

120 Surah al-Nisa’, verse 4.121 Al-Baihaqi, Al-Sunan al-Kubra, Maktabah Dar al-Baz, 1994, v. 6, p. 169, hadith no. 11726.


76. Hibah in Wadiàh Contract

One of the methods in accepting deposits by Islamic financial institutions inMalaysia is based on the concept of wadiàh yad dhamanah. Some of the Islamicbanking institutions give hibah to wadiàh depositors as token of appreciation forthe depositors’ confidence in the institutions. However, one of the concerns is thatthe practice of giving hibah to wadiàh depositors will become an ùrf or norm forbidden by Shariah.

In this regard, the SAC was referred to on the issue as to whether the practice ofgiving hibah by the Islamic banking institution to wadiàh depositors is permissible.

Resolution

The SAC, in its 35th meeting dated 22 May 2003, has resolved that the practice of giving hibah by Islamic banking institutions to wadiàh depositorsis permissible. Nevertheless, such practice shall not become a norm in orderto avoid this practice from becoming an ùrf that resembles a condition in adeposit contract based on wadiàh.

Basis of the Ruling

In the current banking practices, deposited monies by the customers will be usedby the bank for certain purposes such as financing and investment. From theShariah perspective, monies deposited into a deposit account based on wadiàhyad dhamanah is equivalent to a loan based on qard in which the bank must refundthe deposit to the customer upon request according to the agreed terms and conditions. Thus, the requirements of qard and its effects are also applicable in deposit account products based on the concept of wadiàh yad dhamanah.


“From Ali r.a. who said, that Rasulullah SAW had said: Every loan that gives benefit(to the lender) is a riba.”125

122 Al-Bukhari, Sahih al-Bukhari, Al-Matbaàh al-Salafiyyah, 1982, v. 2, p. 146, hadith no. 2305.123 Al-Juzairi, Al-Fiqh àla al-Mazahib al-Arbaàh,Al-Maktab al-Thaqafi, 2000, v. 2, p. 227.124 Ibnu Àbidin, Hasyiyah Radd Al-Muhtar àla al-Durr al-Mukhtar Syarh Tanwir al-Absar, Dar Àlam al-Kutub, 2003,

v. 7, p. 395.125 Ibnu Hajar al-Àsqalani, Bulugh al-Maram min Adillah al-Ahkam, Matbaàh al-Salafiyyah, 1928, p. 176.

A hadith of Rasulullah SAW provides:

“Rasulullah SAW said: The best person among you is the one who does his bestin debt settlement.”122

In a qard contract, a condition that gives benefits to the lender is not allowed.For instance, a condition requiring the borrower to give a free accommodationor at a cheap price to the lender, and giving a reward or gift in return for thelender’s kindness.123

The practice of giving hibah by a borrower to a lender is recommended in Islam.However, it must not be conditional in the contract so as to avoid the element ofriba as stated in the following hadith:124


77. Hibah in Qard Contract

Qard contract is one of the contracts used to manage liquidity in Islamic finance.The contract obliges a borrower to return the loan amount to the lender withoutpromising to pay any additional amount. However, in current practices, a borrowersometimes gives hibah to the lender at his own discretion when paying off thedebts.

In this regard, the SAC was referred to on the issue as to whether the practice ofgiving hibah in the contract of qard is in line with Shariah.

Resolution

The SAC, in its 55th meeting dated 29 December 2005, has resolved that thepractice of giving unconditional hibah in a contract of qard is permissible.Nevertheless, such practice shall not become a norm in order to avoid thispractice from becoming an ùrf that resembles a condition attached to thecontract of qard.

Basis of the Ruling

Even though the act of giving hibah by the borrower to the lender is recommendedin Islam, it cannot be conditional in the contract as it may amount to riba. Any addition to the amount of qard upon repayment, whether in terms of amount, attributes, giving of an asset or benefit, is permissible as long as it is unconditional.

The ruling on giving hibah to a lender is similar to the ruling on giving loan withbenefit, which is prohibited if such hibah is conditional in the contract, but it is allowed if it is not made as conditional.126

Please refer to basis of the ruling as explained in item 76.127

126 Ibnu Àbidin, Hasyiyah Radd al-Muhtar àla al-Durr al-Mukhtar Syarh Tanwir al-Absar, Dar al-Fikr, 2000, v. 7, p. 395.127 Hibah in Wadiàh Contract.


IBRA’

The concept of ibra’ represents the waiver accorded by a person to claim his rightwhich lies as an obligation (zimmah) of another person which is due to him.128 Inthe context of Islamic finance, ibra’ refers to rebate given by one party to anotherparty in mu`amalah such as trade and lease transactions. For example, an Islamicfinancial institution may give ibra’ to its customer who settled their debt prior tothe agreed settlement period as stipulated in the contract concluded by both parties.

78. Ibra’ in Islamic Financing

Most Islamic financial institutions do not include the ibra’ clause in the financingagreement entered with their customer due to the concern that this will give riseto the issue of uncertainty (gharar) in the selling price. However, the exclusion ofibra’ clause from the agreement may also lead to a dispute between the customerand Islamic financial institution on the customer’s entitlement to ibra’ arising fromearly settlement of outstanding debt.

In line with the need to preserve public interest (maslahah) and to ensure fairtreatment between the financier and customer, the SAC was referred to on theproposal to mandate Islamic financial institutions to accord ibra’ to the customerwho settled their debt obligation under sale-based contract (such as bai` bithamanajil or murabahah) prior to the agreed settlement period.

Resolution

The SAC, in its 101st meeting dated 20 May 2010, has resolved that BankNegara Malaysia as the authority may require Islamic financial institutionsto accord ibra’ to their customer who settled their debt obligation arisingfrom the sale-based contract (such as bai` bithaman ajil or murabahah)prior to the agreed settlement period. Bank Negara Malaysia may also require the terms and conditions on ibra’ to be incorporated in the financing agreement to eliminate any uncertainty with respect to customer’s entitlement to receive ibra’ from Islamic financial institution.The ibra’ formula will be determined and standardised by Bank NegaraMalaysia.129

128 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 1, p. 142.129 This decision supersedes the decision made by the SAC in its 13th meeting dated 10 April 2000, 24th meeting

dated 24 April 2002 and 32nd meeting dated 27 February 2003, whereby it was held that giving of ibra’ is at the discretion of the Islamic financial institutions and if the Islamic financial institutions promised to give ibra’ to thecustomer, the institution will be bound by such promise.


“Rasulullah SAW once ordered the people of bani Nadhir to leave Madinah, thenhe received delegates from the people who said: Oh Rasulullah! You ordered us toleave Madinah while we have outstanding debts that must be settled by the localpeople. Then Rasulullah SAW replied: Give discount and accelerate the settlement.”130

Some scholars are of the view that dho` wa taàjjal is not permissible since it issimilar to the practice of riba. They argued that the increment in value of debt dueto an extension of repayment period is considered as riba. Hence, the reduction inthe value of debt arising from shortening the repayment period is also regarded asriba.131

130 Al-Daraqutni, Sunan al-Daraqutni, Mu’assasah al-Risalah, 2004, v. 3, p. 466.131 Al-Baihaqi, Al-Sunan al-Kubra, Maktabah Dar al-Baz,1994, v. 6, p. 28, hadith no. 10924; there are other narrations

in Sunan al-Baihaqi reporting on the prohibition of dho` wa taàjjal by Umar Al-Khattab r.a.; Ibnu Rusyd, Bidayah al-Mujtahid wa Nihayah al-Muqtasid, v. 2, p. 144; Ibnu Qayyim, Ighathah al-Lahfan min Masayid al-Syaitan, Dar Al-Ma`rifah, 1975, v. 2, p. 12.

Basis of the Ruling

Forgoing of rights is closely associated with ibra’ and dho` wa taàjjal in the contextwhereby Islam encourages the financier to waive his right to claim the settlementof a debt (either partially or wholly). The debt obligation is recognised as a liability(zimmah) that is to be settled by the debtor to the financier. Dho` wa taàjjal is aterm used to refer to an act of reducing partial amount of a debt in the event wherethe debtor makes an early settlement.

The evidence on waiving of right to claim part or total amount of debt existed during the lifetime of Rasulullah SAW as stated in the following hadith:


Besides that, there are some arguments stating that the provision on dho` wataàjjal in a debt transaction is not allowed as it will create gharar in the sellingprice. Some scholars are also of the opinion that the provision on dho` wa taàjjalin a debt transaction is not permissible because this practice resembles the characteristic of baiàtain fi al-baiàh transaction which is forbidden by Sunnah.132

However, some scholars are of the view that dho` wa taàjjal is permissible and itis not appropriate to equate dho` wa taàjjal with riba given the essence of bothsubjects are distinct from one another.133

Considering the views of scholars that allow full adoption of dho` wa taàjjal andthose who allow it on a provisional basis, it is concluded that there is no restrictionfor the authority to mandate the implementation of such practice to be compulsory. This is because the directive issued by the authority to implementsuch permissible practices is intended to safeguard the interests of all related parties.

Such an action is consistent with the resolution adopted by the classical scholars,of which the settlement value of the debt that is paid prior to the agreed settlement period should commensurate with the duration prior to its settlement.Ibnu Àbidin wrote on this matter as follows:

“If a debtor settles his debt before it is due or if he passes away and a claim proportion of his estate is claimed (to settle the debt), the contemporary scholarsreplied: Verily, none shall be taken from the murabahah between them exceptthe amount that commensurates with the duration prior to its settlement.”134

132 Abdul Rahman Soleh Al-Atram, Al-Ibra’ fi al-Tamwil al-Islami: Takyifan wa Tatbiqan, Al-Qadaya al-Muàsarah fi al-Tamwil al-Islami: Munaqasyah fi Al-Nadwah al-Àlamiyah li Ùlama’ al-Syariàh 2006, Bank Negara Malaysia,2008, p. 355.

133 Ibnu Rusyd, Bidayah al-Mujtahid wa Nihayah al-Muqtasid, 1975, v. 2, p. 144; Ibnu Qayyim, Ighathah al-Lahfanmin Masayid al-Syaitan, Dar Al-Ma`rifah, 1975, v. 2, p. 13.

134 Ibnu ̀ Abidin, Hasyiyah Radd Al-Muhtar ̀ ala Durr al-Mukhtar Syarh Tanwir al-Absar, Dar al-Fikr, 2000, v. 5, p. 160:


79. Two Forms of Ibra’ in a Financing Agreement

In view that ibra’ is a unilateral waiver of right by a party, an Islamic financial institution may promise to provide ibra’ based on suitable methods. In this regard,the SAC was referred to on a proposal by an Islamic financial institution to adopttwo different methods of ibra’ in a bai` bithaman ajil financing agreement that isstructured based on variable rate. The first method is formulated to address earlysettlement of debt and another method is the monthly ibra’ in order to match theeffective profit rate with the current market rate.

Resolution

The SAC, in its 32nd meeting dated 27 February 2003, has resolved that bothmethods of ibra’ (namely ibra’ for early settlement and monthly ibra’ tomatch the effective profit rate with current market rate) in a financing agreement are permissible.

Basis of the Ruling

In the context of ibra’ for early settlement, the SAC has taken into considerationthe following views of contemporary scholars:

“Whenever a debtor settles his debt before it is due, or passes away, thus the debtis matured due to his death. In the latter situation the debt is settled by claimingfrom his estate. However, none shall be taken from the murabahah except for theamount that commensurates with the duration of the debt prior it was settled. Thisis a reply provided by contemporary scholars (of Hanafi school), Qunyah, and fatwaof Mufti of Rome, i.e. al-marhum Abu Sa`ud Afandi. The effective cause (`illah) thatwas given is al-rifq (compassion) for both parties. (He said: None shall be takenfrom the murabahah), its illustration: A person bought something for the cash priceof 10, and then he sold to another for 20 with deferred payment of 10 months. Ifthe buyer settled the payment after five months or passed away after such period,the seller should only take five and waive the remaining five.”135

135 Ibnu ̀ Abidin, Hasyiyah Radd al-Muhtar ̀ ala Durr Al-Mukhtar Syarh Tanwir al-Absar, Dar al-Fikr, 2000, v. 29, p. 348 - 349:


For monthly ibra’, the SAC referred to the discussion among the scholars on typesof ibra’. Two types of ibra’, which closely resemble the aforesaid practice are ibra’muqayyad and ibra’ muàllaq. An example of ibra’ muqayyad is as follows:

“I will give you ibra’ if you do such and such actions…”

Whereas, an example for ibra’ muàllaq is:

“If you do such a deed, I will give you ibra’.”136

Some of the Hanafi’s scholars view that the aforesaid ibra’ is not permissible if thecondition in giving the ibra’ becomes a normal practice (mutaàrafan). Whilst theschools of Maliki and Imam Ahmad allow such ibra’.137

Ibra’ muàllaq, as illustrated by some of fiqh scholars, is viewed as identical to themethod of monthly ibra’. This is because ibra’ which is given on monthly basis isalso subjected to certain rate changes. This clearly indicates that the applicationof ibra’ may be extended in accordance with current needs as long as it does notcontradict with general principles of Shariah.

Besides that, offering of ibra’ is a right of the financier. Thus, the financier mayapply ibra’ in whatever forms at his discretion.

136 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsuàh al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 1, p. 165.137 Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsuàh al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 1, p. 165 - 166:


80. Ibra’ in Home Financing Product Linked to a Wadiàh or MudarabahDeposit Account

An Islamic financial institution would like to offer a home financing product. Oneof the special features of the product is that the customer will receive ibra’ on themonthly installment amount if he links the home financing to a wadiàh depositaccount or a mudarabah deposit account. Under this mechanism, ibra’ on monthlyinstallment will be accorded to the customer based on the outstanding balance ofdeposit in wadiàh or mudarabah deposit account. In this regard, the SAC was referred to on the issue as to whether the structure of the product complies withShariah.

Resolution

The SAC, in its 63rd meeting dated 27 December 2006, has approved theproposal on home financing product linked to a mudarabah deposit accountwith the condition that the cost associated with the ibra’ shall be borne solelyby the Islamic financial institution. However, the SAC, in its 64th meetingdated 18 January 2007, has resolved that the proposal to link the home financing product with a wadiàh deposit account is not allowed because ofthe concern that its nature is syubhah to riba.

Basis of the Ruling

The existence of linkage or relation between home financing and a wadiàh or mudarabah deposit account will consequently benefit the depositors. In the caseof mudarabah deposit, the element of benefit is not an issue in Shariah. However,for wadiàh deposit (which applies the ruling of qard), the element of conditionalbenefit is forbidden.

Please refer to basis of the ruling as stated in item 76.138

138 Hibah in Wadiàh Contract.


Islamic banking operation materialised through financing transaction undertakenbetween financier and customer. Both parties are expected to observe specificobligations stipulated under the financing contract. The financier is obliged toprovide financing to the customer as stipulated in the contract and the customeris obliged to settle the total amount of financing within the stipulated period. Ifthe settlement is not made within the specified period, the financial activity ofthe financier will inevitably be affected. The discussion on the methods to claimcompensation for losses in Islamic financial activities in Malaysia covers the aspectsof default in settlement of debt, judgment debt and early settlement of debt. Inthe context of financing, ta`widh refers to claim for compensation arising fromactual loss suffered by the financier due to the delayed in payment offinancing/debt amount by the customer. Whilst gharamah refers to penaltycharges imposed for delayed in financing/debt settlement, without the need toprove the actual loss suffered.139

81. Imposition of Ta`widh and Gharamah in Islamic Financing

Facilities

In conventional financial system, the problems associated with default in loan repayment are controlled by charging interests or riba on customers. Since the imposition of interests or riba is prohibited by Shariah, Islamic financial institutionsdo not adopt this mechanism to address cases on customers’ default in settlingtheir financial obligations under Islamic contracts. The SAC was referred to ascertain a Shariah compliant mechanism to deal with this issue.

Resolution

The SAC, in its 4th meeting dated 14 February 1998, 95th meeting dated28 January 2010 and 101st meeting dated 20 May 2010, has resolved thatthe late payment charge imposed by an Islamic financial institution encompassing both concepts of gharamah (fine or penalty) and ta`widh(compensation) is permissible, subject to the following conditions:

139 Mohammad Abdul Razaq al-Tabtabae, Al-Ta`widh ̀ an al-Dharar wa al-Gharamah ̀ ala al-Ta’khir fi al-Duyun: DirasahTatbiqiyyah àla al-Mu’assasat al-Maliyyah al-Islamiyyah fi Daulati al-Kuwait,Al-Qadaya al-Muàsarah fi al-Tamwil al-Islami: Munaqasyah fi al-Nadwah al-Àlamiyah li Ùlama’ al-Syariàh 2006, Bank Negara Malaysia, 2008, p. 91.

TA`WIDH ANDGHARAMAH


i. Ta`widhmay be charged on late payment of financial obligations resultedfrom exchange contracts (such as sale and lease) and qard;

ii. Ta`widh may only be imposed after the settlement date of the financingbecame due as agreed between both contracting parties;

iii. Islamic financial institution may recognise ta`widh as income on the basisthat it is charged as compensation for actual loss suffered by the institution; and

iv. Gharamah shall not be recognised as income. Instead, it has to be channeled to certain charitable bodies.

Basis of the Ruling

The permissibility of imposing ta`widh on a defaulted customer is considered basedon the following evidences and arguments:

i. The following hadith of Rasulullah SAW that considers intentional delay in debtpayment by a person, who is able to pay, is a tyranny:

“From Abi Hurairah that Rasulullah SAW had said: Delay by a rich person (inpayment of debt) is a tyranny.”140

140 Al-Bukhari, Sahih al-Bukhari,Al-Matba`ah al-Salafiyyah, 1982, v. 2, p. 175.141 Ahmad al-Zarqa’, Syarh al-Qawa`id al-Fiqhiyyah, Dar al-Qalam, 1989, p. 165.

ii. There is also a fiqh maxim extracted from a hadith relating to this matter:


“Neither harming nor reciprocating harm (in Islam).”141

“Whatever harm should be removed.”144

Based on the aforesaid fiqh maxim, imposition of ta`widh and gharamah ondelayed payment of debt is an appropriate approach to mitigate the harm suffered by the financier, and at the same time instilled discipline on customerto make payment according to the stipulated schedule.

142 Al-Syirazi, Al-Muhazzab fi Fiqh al-Imam al-Syafii, Dar al-Qalam, 1996, v. 3, p. 412; Al-Zuhaili, Fiqh al-Hanbali al-Muyassar, Dar al-Qalam, 1997, v. 3, p. 7.

143 Majmuàh Dallah Barakah, Qararat wa Tawsiyyat Nadawat al-Barakah, 1985, 3rd Convention, resolution no. 3/2.144 Al-Suyuti, Al-Asybah wa al-Naza’ir, Dar al-Kutub al-Ìlmiyyah, 1403H, p. 83 - 84.

Based on this maxim, the delay in payment by the customer will create harmto the Islamic financial institution as the financier whereby the Islamic financialinstitution will suffer actual loss in terms of incurring additional expenditure,such as cost for issuing notices and letters, legal fees and other related costs.These issues should be avoided in order to ensure that business transactionsare conducted according to the principle of market efficiency (istiqrar taàmul).

iii. Late payment of debt is analogous to usurpation (ghasb). Both share the sameìllah which is tyrannically obstructing the use of the property and exploitingit. In the case of ghasb, Imam Syafii and Hanbali are of the view that the benefit of the seized property is guaranteed and shall be compensated.142 Inthe case of delayed payment of financing amount, the financier is also unableto utilise the fund for other business purposes, of which should be settledwithin stipulated period. Therefore, the customer should pay compensationto the losses suffered by the financier.143

iv. Fiqh maxim:


82. Imposition of Compensation on a Customer who Makes Early Settlement

The SAC was referred to on the issue as to whether an Islamic financial institutionmay impose compensation on a customer who makes early settlement in an Islamicfinancing.

Resolution

The SAC, in its 24th meeting dated 24 April 2002, has resolved that an Islamicfinancial institution is not allowed to claim compensation from a customerwho makes early settlement in an Islamic financing.

Basis of the Ruling

Compensation charges imposed by an Islamic financial institution on a customerwho makes early settlement in an Islamic financing is not consistent with the objective of Shariah since Islam encourages early settlement of any kind of debt.Furthermore, there is a hadith of Rasulullah SAW that considers intentional delayby a debtor in debt payment despite his ability to pay as tyranny.

Imposition of compensation charges for early settlement of Islamic financing is alsoconsidered as an inappropriate practice given that Islamic financial institution mayuse the fund for investment or to provide financing to other customers. With respect to customer who had enjoyed certain privilege at the initial stage of financing facility, the Islamic financial institution may deal with this issue by reducingthe amount of ibra’.


83. Method of Late Payment Charge on Judgment Debt

The existing procedural law provides the court with the power to impose interestcharge on the judgment debt as decided by court. This interest charge is imposedon the judgment debt at a rate of 8% per annum of the total judgment amount,which is calculated commencing from the date of the judgment until the judgment debt is settled by the judgment debtor to the judgment creditor.

With respect to Islamic finance cases, such claim also existed but the court normally exercises its discretion not to impose interest charge since the mechanismis based on riba. If the claim is made in court for fixed rate financing cases suchas murabahah or bai` bithaman ajil, the judgment creditor will submit a claim forthe total outstanding balance of selling price, subject to the amount of rebate(ibra’), if any.

In this regard, the SAC was referred to ascertain the mechanism to avoid delay insettling judgment debt for Islamic finance cases.

Resolution

The SAC, in its 50th meeting dated 26 May 2005, 61st meeting dated 24August 2006 and 100th meeting dated 30 April - 1 May 2010, has resolvedthat the judge may impose late payment charge on judgment debt as decided by the court rules on cases of Islamic banking and takaful basedon the methods of gharamah and ta`widh on actual loss according to thefollowing mechanisms:

i. Court may impose late payment charge at the rate as stipulated by theprocedures of court.145 However, from this rate, the judgment creditor (Islamic financial institution) is only allowed to receive compensationrate for actual loss (ta`widh);

145 The SAC, in its 50th meeting dated 26 May 2005 and 61st meeting dated 24 August 2006, has resolved that therate is 8%.


ii. To determine the compensation rate for actual loss (ta`widh) that may beapplied by the judgment creditor, the SAC agreed to adopt the“weighted average overnight rate” of Islamic money market as a reference; and

iii. The total compensation charge shall not exceed the principal amount ofdebt. If the actual loss is less than the applicable rate for judgment in current practice, the balance shall be channeled by judgment creditor tocharitable organisation as may be determined by Bank Negara Malaysia.

If the judgment creditor is an individual (for example, the payment of takafulbenefits by a takaful company to participant), the judgment debtor shall onlybe obliged to pay ta`widh to the judgment creditor in addition to the judgment debt. The judgment debtor needs to channel the excess of thelate payment penalty charge (if any) directly to charitable organisations asmay be determined by Bank Negara Malaysia.

For judgment debt in cases which involves payment of takaful benefits bytakaful company to the participant, the late payment compensation afterthe judgment date shall be paid from the shareholders’ fund.

Basis of the Ruling

Al-Zaila`i view that the creditor may bring an action against the debtor in court ifthe latter intentionally delays the payment of debt despite his affordability to do so.If such intentional delay is proven, the judge may sentence appropriate penalty onhim.146

146 Al-Zaila`i, Tabyin al-Haqa’iq, Dar al-Kutub al-Islami, (n.d.), v. 124, p. 74.



PART III: ISLAMIC FINANCIAL PRODUCTS

Islamic financial derivative instruments such as swaps, forwards and options havebeen introduced in Islamic finance as one of the hedging mechanisms to enhancerisk management capability of market participants. In addition, these instrumentsare also used by Islamic financial institutions as a measure to diversify the rangeof investment products offered to sophisticated investors.

84. Spot and Forward Foreign Currency Exchange Transactions

A number of Islamic financial institutions in Malaysia undertake the spot and forward foreign currency exchange (foreign exchange) transactions. In the currentmarket practice, the delivery and settlement of the foreign currency transactionsare not made in cash at the same time and on the same date when the transactionis concluded. In the case of a spot transaction, the payment is settled on T+2 (twodays after the transaction date). Whereas the settlement of a forward transactionis executed on an agreed future date, for example, one month, three monthsafter the transaction date or at a specific date stipulated in the contract. In termsof Shariah concept, Islamic financial institutions that conduct forward foreign exchange transaction have introduced the concept of wa`d, whereby one of theparties to the contract promises to buy from or sell to the other counterparty aspecific currency at an agreed exchange rate and settlement date.

For the conduct of forward foreign exchange transactions, Islamic financial institutions have proposed to adopt the unilateral binding promise (wa`d mulzim)by one party. In the context of this transaction, the customer agrees to make aunilateral promise to buy foreign currency from an Islamic financial institution thatwill be settled at a specified future date. In the event of a default or non fulfillmentof promise, the customer has to compensate the actual amount of losses (if any)suffered by the Islamic financial institution.


i. Whether the T+2 settlement practice for a spot foreign exchange transactionis permissible under Shariah; and

ii. Whether the unilateral wa`d mulzim (binding promise) is permissible to be applied in a forward foreign exchange transaction.

FINANCIAL DERIVATIVE INSTRUMENTS


Resolution

The SAC, in its 38th meeting dated 28 August 2003, has resolved that thedelivery and settlement of a spot foreign exchange transaction based on T+2is permissible.

The SAC, in its 49th meeting dated 28 April 2005, has also resolved that Islamic financial institutions are allowed to conduct forward foreign exchange transactions based on unilateral wa`d mulzim (binding promise)which is binding on the promissor. In addition, the party who suffers lossesdue to non-fulfillment of promise may claim compensation. The forward foreign exchange transactions may be carried out by the Islamic financial institutions with their customers, among Islamic financial institutions, or between the Islamic and conventional financial institutions.147

Basis of the Ruling

The settlement and delivery of spot foreign exchange transaction based on T+2 ispermissible given that such duration is required by the contracting parties to confirmthe trade transaction. This method of settlement and payment has been acceptedand recognised as a customary business practice.

In addition, the permissibility of unilateral wa`d mulzim on forward foreign exchange transaction has considered the following rulings and views:

i. Contemporary fatwa views that the application of unilateral promise to buy foreign currency that will be received or delivered at a future date is permissible.148 In this regard, the unilateral wa`d is treated as a promise and doesnot tantamount to a contract;

147 The SAC, in its 79th meeting dated 29 October 2008 while discussing on option products including foreign exchangeoption, has resolved that the option products shall be used for hedging purposes only. Since the forward foreignexchange product is classified as derivative instrument that is similar to the option products, the SAC decision in its79th meeting for item 88 is also applicable in the context of forward foreign exchange transactions.

148 Kuwait Finance House, Al-Fatawa al-Syar`iyyah fi al-Iqtisadiyyah (latest edition), v. 1, p. 137, fatwa no. 171.


ii. Majority of the fuqaha is of the view that the application of binding bilateralpromise (muwaàdah mulzimah) on foreign exchange transaction is prohibitedgiven that the muwaàdah mulzimah in this context is similar to a sale contract;149 and

iii. Muwaàdah mulzimah in a foreign exchange transaction is prohibited as it involves sale of debt for debt (bai` al-kali’ bi al-kali’).150

85. Islamic Profit Rate Swap Based on Bai` Ìnah

Islamic Profit Rate Swap (IPRS) is an agreement entered between two parties tomutually exchange profit rates (between fixed rate and floating rate) through theexecution of a series of Shariah compliant sales contracts to trade certain assets.The objective of IPRS is to enable the bank to manage the mismatch betweencash inflow generated from the asset and cash outflow arising from payment ofexpenditure or cost of funding associated with the liability side of the balancesheet.

In this regard, an Islamic financial institution proposed to introduce IPRS basedon Shariah contract of bai` ìnah to be conducted among financial institutions orbetween Islamic financial institutions and other IPRS counterparties. The proposedmechanism of the IPRS is as follows:

First stage

i. An Islamic financial institution invests in Mudarabah Interbank Investment withanother financial institution of which this investment will be used as the underlying asset in the swap transaction; and

ii. The Islamic financial institution will enter into IPRS agreement with a thirdparty (for example Bank XYZ) to conduct series of trade transactions at agreeddates, for instance, during a two-year period, the dates are reset at every sixmonths.

149 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1988, 5th Conference, resolutions no. 40 and 41.150 Majmuàh Dallah Barakah, Qararat wa Tawsiyyat Nadawat al-Barakah, 1990, 6th Conference, resolution no. 6/23.


Second stage

iii. The Islamic financial institution sells Mudarabah Interbank Investment to BankXYZ at a deferred sale price payable in every six months;

iv. Subsequently, Bank XYZ will sell back the Mudarabah Interbank Investment tothe Islamic financial institution at a sale price based on fixed profit rate;

v. The settlement of the purchase price due from the Islamic financial institutionunder step (iv) will be offset against the payable amount from Bank XYZ understep (iii) following the trading of Mudarabah Interbank Investment; and

vi. As a consequence, the Islamic financial institution will pay the fixed profit rateto Bank XYZ at every six months during the two years period.

Third stage

vii. The Islamic financial institution will sell the Mudarabah Interbank Investment toBank XYZ at an agreed price, that has been based on the prevailing floatingprofit rate;

viii.Subsequently, Bank XYZ will sell back the Mudarabah Interbank Investment tothe Islamic financial institution at an agreed price;

ix. The settlement of the purchase price due from Bank XYZ under step (vii) will beoffset against the payable amount from the Islamic financial institution understep (viii) following the trading of Mudarabah Interbank Investment;

x. Bank XYZ will pay the floating profit rate for every six months for the two yearsperiod; and

xi. The difference between payment obligations of both contracting parties resulting from step (vi) in the second stage and step (x) in the third stage will bepaid to the receiving party.


Fourth stage

xii. The third stage will be repeated at an agreed reset date which will be determined at every six months until the contract matures.

In the event of early termination, one of the parties that hold a debt obligationto the other party shall be responsible to settle the amount due, which is knownas “close-out”. In the conventional interest rate swap, the close-out amount isdetermined based on the market quote methodology, which refers to the standard formula adopted by market participants to determine the payable compensation amount.


i. Whether the offsetting between the first transaction (step iii) and the secondtransaction (step iv) is permissible under Shariah given that the payment forboth transactions are not settled in cash and therefore, may give rise to thepossibility that the transaction is a “sale of debt with debt (bai` al-dayn bi al-dayn)” that is prohibited by the Shariah;

ii. Whether the documentation of the IPRS is sufficient to prove that the transferof ownership and possession (qabd) of the underlying asset that is transacted,which is the Mudarabah Interbank Investment has taken place; and

iii. Whether the methodology to determine the close-out amount for the conventional interest rate swap is applicable to the IPRS.

Resolution

The SAC, in its 44th meeting dated 24 June 2004, has resolved that theproposed offset practice in the IPRS structure is permissible and does nottantamount to the sale of debt with debt, which is prohibited by theShariah.


The SAC has also resolved that the transfer of beneficial ownership that isreflected in the contract documentation is sufficient, accepted and recognised by the Shariah.

In its 54th meeting dated 27 October 2005, the SAC has also resolved thatthe methodology to determine the close-out amount under the conventionalinterest rate swap is also applicable to the IPRS.

Basis of the Ruling

The SAC is of the view that the issue of sale of debt with a debt, which is prohibitedby the Shariah, does not arise in the proposed IPRS structure based on the followingconsiderations:

i. The second transaction (step iv) is a sale of an asset that is bought and ownedby the seller as a result of the first transaction (step iii), although the seller hasnot settled the purchase price. The second party does not sell a debt given thatthe debt obligation created from the first transaction belongs to the first party.Thus, the asset sold in the second transaction is an asset owned by the sellerand therefore does not give rise to the issue on the sale of debt; and

ii. The principle of muqasah (offset) is a common practice and acceptable in theevent where two parties are indebted to each other and the debts are settledbased on the payment of the difference between the two debts amount.

The SAC has considered the following arguments as the basis of the ruling withrespect to the issue on the transfer of beneficial ownership, which was reflected inthe contract documentation:

i. The Shariah accepted and recognised both concepts of ownership namely thelegal ownership and the beneficial ownership; and

ii. The transfer of ownership took place automatically given that the underlyingasset used in the transaction is Mudarabah Interbank Investment. The documentation on the sale and purchase agreement is the main evidence forthe transfer of ownership. Therefore, the investor has the right to sell the assetto a third party without referring to or executing the transfer of ownership atthe bank that received the investment.


With regards to the methodology to determine the close-out amount in IPRS, theSAC is of the view that the market quote methodology may be applied to IPRS ifthe contracting parties are convinced that the outcome of the application represents the actual loss suffered by a party to the contract as a result of a defaultby the other party. This view has considered the fact that the methodology fordetermination of ta`widh by a third party in the context of profit rate swap is notpractical.

86. Forward Foreign Currency Exchange Transaction Based on Bai`Mu’ajjal

An Islamic financial institution proposed to introduce forward foreign currencyexchange based on bai` mu’ajjal (deferred payment sale) and bai` sarf (sale of currency) as an alternative to forward transaction based on wa`d. The mechanismfor the product is as follows:

i. The customer will appoint the Islamic financial institution as his agent to buycommodity X from Broker B amounting to USD1 million with deferred payment terms that will be paid at a future date (Y date). The delivery of thecommodity will be made on the spot;

ii. The customer will then sell commodity X to the Islamic financial institution atthe price of RM3.5 million with a deferred payment terms that will be paid atY date. The delivery of the commodity will also be made on the spot;

iii. The Islamic financial institution will then sell commodity X to Broker A at USD1million on deferred payment terms and payable at Y date. Commodity X willbe delivered to Broker A on the spot; and

iv. At the value date, which is the Y date, the customer will pay USD1 million toBroker B and will receive RM3.5 million from the Islamic financial institution.Simultaneously, the Islamic financial institution will pay RM3.5 million to thecustomer and will receive USD1 million from Broker A. Therefore, the customerwill be able to hedge USD1 million against RM3.5 million at a future datewhich is the Y date.


In this case, the SAC was referred to on the issue as to whether forward foreigncurrency exchange that is structured based on bai` mu’ajjal and bai` sarf is permissible.

Resolution

The SAC, in its first special meeting dated 13 April 2007, has resolved thatthe forward foreign currency exchange transaction based on the above structure is permissible. However, the term bai` sarf in the transaction is notrelevant because in reality there is no actual bai` sarf transaction despiteachieving similar outcomes.

Basis of the Ruling

The aforesaid resolution of the SAC is formulated based on the following considerations:

i. Deferred payment sale is permissible based on ijma` as stated by Ibnu Hajar in hisbook:

“Deferred payment sale is permissible by ijma`.”151

ii. In the proposed product structure, all the deferred payment sale transactionsare conducted independently and not related to each other. Therefore, thistransaction complies with the condition specified under Shariah.

151 Ibnu Hajar al-`Asqalani, Fath al-Bari Syarh Sahih al-Bukhari, Dar al-Ma`rifah, 1959, v. 4, p. 302.


87. Foreign Currency Option Based on Hamish Jiddiyyah, Wa`d andTawarruq

An Islamic financial institution proposed a foreign currency option product basedon hamish jiddiyyah (security deposit), wa`d (promise) and tawarruq transaction.Under this product, customers who wish to hedge their forward foreign currencyexchange transactions through this instrument should make wa`d to an Islamicfinancial institution to purchase certain amount of commodity from the institutionand also to appoint the Islamic financial institution to sell the said commodity toa third party.

As a consequence, the Islamic financial institution will require the customer toprovide hamish jiddiyyah to assure the execution of wa`d by the customer. At theagreed date, tawarruq transaction will be conducted where the sale and purchaseof specific commodity will be executed for spot payment and spot delivery. Eachof the sale and purchase transaction in the tawarruq will involve different currencies and the hamish jiddiyyah will be refunded to the customer if both parties fulfill their promises.

In this regard, the SAC was referred to on the issue as to whether the proposedforeign currency option product is permissible according to the Shariah.

Resolution

The SAC, in its 73rd meeting dated 20 February 2008, has resolved that theproposed foreign currency option product based on hamish jiddiyyah, wa`dand tawarruq transaction is permissible. Nonetheless, the sale and purchasetransactions shall be referred to as a promise to buy (wa`d bi al-syira’) perse.

In the event of a breach of promise, the party to the transaction who suffers losses may recover the actual amount of losses from the value ofhamish jiddiyyah. The recognition and measurement of actual loss shall bedone as follows:


i. The actual loss shall be measured based on the difference between thesale price of the commodity, subsequent to the failure of the customerto conduct the transaction and the promised purchase price of the commodity. The actual loss shall be equal to the sales price in the marketsubsequent to the default event minus the purchase price promised bythe customer (the sales proceed is less than the purchase cost);

ii. The Islamic financial institution may acquire the whole amount of hamishjiddiyyah to recover the actual losses if the calculated amount based onthe above methodology is equal or more than the value of hamish jiddiyyah. If the actual loss is lower than the hamish jiddiyyah value, thecustomer may agree to channel the residual amount to charitable organisations under the supervision of the Shariah committee of the saidIslamic financial institution; and

iii. Item (i) and (ii) shall be clearly stated and agreed upon by the customer.

Basis of the Ruling

Hamish jiddiyyah, wa`d and tawarruqmay be implemented according to the opinionof contemporary scholars which allows these concepts to be used in financial transactions. The amount of hamish jiddiyyahmay be acquired by the affected partyif there is an actual loss arising from the breach by the party making the wa`d.

88. Foreign Currency Option Based on Wa`d and Two IndependentTawarruq Transactions

An Islamic financial institution proposed foreign currency option product based onwa`d and two independent tawarruq transactions. Under this product, a customerwho wishes to hedge his forward foreign currency exchange will make wa`d to anIslamic financial institution to buy a specific amount of commodity from the Islamicfinancial institution. Subsequently, the customer will appoint the Islamic financialinstitution as agent to sell the commodity to a third party.


At the initiation date of the option contract, the customer and the Islamic financialinstitution will conduct the first tawarruq transaction to receive profit from thesale of which is equivalent to the amount of premium in a conventional optiontransaction. Subsequently, the second tawarruq transaction will be conducted atan agreed date with the sale and purchase of the commodity for spot paymentand delivery.

In this regard, the SAC was referred to on the issue as to whether the proposedforeign currency option product based on wa`d and two independent tawarruqtransactions is permissible according to the Shariah.

Resolution

The SAC, in its 79th meeting dated 29 October 2008, has resolved that thestructure of the proposed foreign currency option product based on wa`dand two independent tawarruq transactions is permissible, provided thatthe following conditions are satisfied:

i. The option product shall only be undertaken for hedging purpose;

ii. Wa`d shall be made independently from the tawarruq transaction andshall not form part of the condition to perform the tawarruq transaction;

iii. The Islamic financial institution shall ensure that every transaction isconducted independently from each other in terms of documentationand sequence of transactions; and

iv. The underlying asset shall be Shariah compliant.

Basis of the Ruling

The SAC’s resolution to set out the conditions for wa`d to be conducted independently from tawarruq transactions and it shall not be made conditionalto that trade transaction, is aimed to prevent wa`d from being used as an exchangeable item for certain counter value. This pronouncement is consistentwith the opinion of contemporary scholars where wa`d shall not be priced ortraded.152

152 AAOIFI, Al-Ma`ayir al-Syar`iyyah, rule no. 20, paragraph 3/3/2/5.


Credit card refers to a card that facilitates the cardholder to purchase goods andservices as well as to withdraw cash based on the agreed terms and conditionsspecified in the contracts between the cardholder and card issuer. The cardholderis allowed to pay the purchase transaction based on credit as an alternative methodof payment apart from payment by cash or by cheque. In order to ensure that Islamic credit card is used according to Shariah requirements, various guidelines onthe usage of Islamic credit card need to be established.

89. Islamic Credit Card Based on Bai` Ìnah and Wadiàh

There was a proposal from an Islamic financial institution to offer Islamic credit cardbased on two Shariah concepts, namely bai` ìnah (to raise fund for the purpose ofproviding credit facility to customers) and wadiàh (to provide custody services forthe fund raised under the bai` ìnah contract).

Under this credit card product mechanism, the Islamic financial institution will sellan asset at a nominal value plus profit to the customer with deferred payment termsof three years. Subsequently, the customer will sell back the same asset to the Islamic financial institution at a nominal value and payable on cash basis. The saleproceeds will be credited into wadiàh account in the Islamic financial institution tofacilitate the purchases of goods or services by the customer. Both sale and purchasetransactions will be consecutively executed in two separate and independent contracts.


i. Whether the proposed credit card product based on bai` ìnah and wadiàh concepts is permissible; and

ii. If the credit card product is permissible, whether it may be used to finance thepurchase of ribawi items such as gold, silver and food items.

ISLAMIC CREDIT CARD SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE148


Resolution

The SAC, in its 18th meeting dated 12 April 2001, has resolved that theproposed credit card product structured based on bai` ìnah and wadiàh,as well its uses to purchase gold, silver and other halal goods is permissible.

Basis of the Ruling

The resolution passed by the SAC has considered the following:

i. The permissibility of bai` ìnah concept and its application in the credit cardproduct is consistent with the accepted sources and arguments on bai` ìnahas stated under item 69;153

ii. The application of wadiàh in the proposed credit card mechanism, which complements bai` ìnah contract to enable the sale proceeds to be depositedwith the Islamic financial institution for customer’s use is permissible byShariah; and

iii. The issue of purchasing ribawi items does not arise given that the transactioninvolves cash and goods and not an exchange between ribawi items. In addition, the settlement of the purchase price is deducted from the existingcustomer’s wadiàh account.

90. Islamic Credit Card Based on the Concept of Ujrah

There was a proposal from a number of Islamic financial institutions to offer creditcard product based on the concept of ujrah (fee). The cardholder is imposed withujrah as a consideration for the services provided as well as the benefits and privileges offered by the Islamic financial institutions to the cardholders. In thisregard, the SAC was referred to on the issue as to whether the proposed creditcard structure based on the concept of ujrah is permissible.

153 Application of Bai’ ‘Inah Concept in Issuance of Islamic Negotiable Debt Certificate.

Resolution

The SAC, in its 77th meeting dated 3 July 2008 and 78th meeting dated 30July 2008, has resolved that the proposed credit card structured based onthe concept of ujrah is permissible subject to the following conditions:

i. Islamic financial institutions shall ensure that the ujrah is imposed as aconsideration for the provision of actual or non-fictitious services, benefitsand privileges that are permissible under Shariah;

ii. The imposition of different amount of ujrah on various types of creditcards that offer different kind of services, benefits and privileges is permissible;

iii. The imposition of ujrah on the services, benefits and privileges which arenot related to qard, deferment of debt and exchange of cash with cashat a different value is permissible; and

iv. The imposition of ujrah on the services, benefits and privileges relatingto qard, deferment of debt and exchange of cash with cash at a differentvalue is not permissible. However, charges may be imposed to cover theactual management cost (nafaqah/taklufah).

Basis of the Ruling

Ujrah refers to a fee that is permissible in Islam based on sources from the verse ofal-Quran and hadith as follows:

Allah SWT says:


“… the best of men for you to hire is the strong, the trustworthy.”154

A hadith of Rasulullah SAW provides:

“Pay the worker his wages before his sweat dries off.”155

154 Surah al-Qasas, verse 26.155 Al-Baihaqi, Al-Sunan al-Kubra, Maktabah Dar al-Baz, 1994, v. 6, p. 120, hadith no. 11434.


91. Takaful Cover for Islamic Credit Cardholders

There were proposals by Islamic financial institutions to provide takaful coverageassociated with personal accident as one of the privileges of which ujrah will beimposed to Islamic credit cardholders. In this regard, the SAC was referred to onthe issue as to whether the proposed provision of takaful coverage with the imposition of ujrah is permissible.

Resolution

The SAC, in its 77th meeting dated 3 July 2008, has resolved that the proposed provision of personal accident takaful coverage as one of theprivileges to the Islamic credit cardholders that will be charged with ujrahis not in line with Shariah. Nevertheless, the provision of takaful coverageis permissible if it is offered as a hibah without any imposition of ujrah.

Basis of the Ruling

The imposition of ujrah for personal accident takaful coverage is not permissibledue to the following considerations:

i. The Islamic credit cardholders are not direct participants in the takaful scheme.However, the payment of ujrah is instead imposed on the cardholders as aconsideration for the takaful cover arranged by Islamic financial institutionswith a third party; and

ii. Since the ujrah is paid by the customers to the Islamic financial institutions forbenefit coverage against risk, hence such arrangement is prohibited by theShariah considering that the cash is exchanged with cash at different values.156

156 Wizarah al-Awqaf wa al-Syu’un al-Islamiyyah, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 22, p. 57.

Therefore, the application of hibah concept is considered as an appropriate alternative compared to ujrah in order to avoid syubhah associated with the prohibition of exchanging cash with cash at different values. In addition, there isno Shariah restriction on the application of hibah.

92. Cash Back Rebate on Credit Card Annual Fee

An Islamic financial institution that offered ujrah-based credit card product soughtthe SAC’s views on the proposal to provide undertaking to offer cash back rebateon the annual fee if the cardholder utilised the card at least twice a month.

Resolution

The SAC, in its 77th meeting dated 3 July 2008, has resolved that the Islamicfinancial institution that offered ujrah-based credit card is not permitted tooffer cash back rebate to the Islamic credit cardholder. Nonetheless, this facility may be offered as a hibah to the cardholders without any impositionof ujrah.

Basis of the Ruling

The aforesaid resolution considered that the proposed cash back provision coupledwith ujrah charges would create the element of exchanging cash with cash at different counter values, which is prohibited by the Shariah.157


157 Wizarah al-Awqaf wa al-Syu’un al-Islamiyyah, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 22, p. 57.


93. Islamic Credit Card Based on the Concepts of Wakalah andKafalah

An Islamic financial institution proposed to offer Islamic credit card product basedon the concepts of wakalah and kafalah that incorporate specific credit limit onthe cardholder. Purchases of goods and services made by the cardholder will bepaid by the merchant bank on behalf of the cardholder. The merchant bank wouldthen send all the documents relating to the transactions to Visa/Mastercard, whichfunctions as intermediary between the merchant bank and the Islamic financialinstitution. In this regard, Visa/Mastercard will claim from the Islamic financial institution the amount payable to the merchant bank.

Under the wakalah concept, the credit cardholder will be charged with ujrah. Thecharges will be calculated based on a specific percentage of the approved creditlimit as a consideration for agency services provided by the Islamic financial institution to settle the cardholder’s payment obligation to the merchant bank.In the case of kafalah concept, the Islamic financial institution guarantee the payment to Visa/Mastercard (for the payment made to the merchant bank) andguarantee the payment for goods or services purchased by the credit cardholderfrom the merchant.


i. Whether the application of wakalah and kafalah concepts in the proposed Islamic credit card structure is permissible by the Shariah; and

ii. Whether the method adopted by the Islamic financial institution to determineujrah based on specific percentage of the credit limit is permissible.

Resolution

The SAC, in its 78th meeting dated 30 July 2008, has resolved the following:

i. The fiqh adaptation (takyif fiqhi) of ujrah on wakalah in the proposedcredit card structure is not accurate;

ii. Method to determine ujrah amount that is based on certain percentageof the credit limit is not in line with the Shariah and contradicts the decision of majority Shariah advisors at the international level; and

iii. Ujrah on wakalah or others shall be a fixed amount without being tiedto a credit limit in order to avoid the element of riba.

Basis of the Ruling

The fiqh adaptation (takyif fiqhi) of ujrah on wakalah in the proposed Islamic creditcard structure is not accurate since the role of Islamic financial institution as wakeelto the cardholder is confined to execute settlement of payment to the merchantsonly. However in reality, Islamic financial institutions also offer other services andbenefits to the credit cardholders.

In addition, the proposed method to determine ujrah for wakalah based on a certain percentage of the credit limit would give rise to the issue of conditionalbenefit on loan (qard), which is prohibited by the Shariah.


Islamic financial institutions have increasingly enhanced their efforts in researchand development on Islamic financial products to create greater diversity in Islamicfinancial products that are able to satisfy customer needs. New innovations havebeen explored, which include among others, the collective numbers of severalShariah contracts in a single product package in order to achieve specific objectives. Since the collective numbers of several Shariah contracts in a singleproduct package is considered as a new innovation, hence the validation and approval of the SAC is important to ensure that these products are in line with Islamic principles.

94. Current Account Product Based on Wadiàh Yad Dhamanah andMudarabah Contracts

An Islamic financial institution proposed to offer current account product basedon wadiàh yad dhamanah and mudarabah contracts. The structure of this product enables the Islamic financial institution to perform two roles, which areas a trustee and an entrepreneur to the funds deposited and invested by the customer respectively. Nonetheless, both contracts will not be executed simultaneously at the same time. The applicable contract of either the wadiàhyad dhamanah or mudarabahwill be determined based on the minimum averagedaily balance of the deposits in a month.

For example, an Islamic financial institution sets out the requirement for accountholder to maintain a minimum average daily balance of RM3,000 a month to beeligible to enter into a mudarabah contract. In this regard, the Islamic financialinstitution will review the minimum average daily balance of the customer’s account on a monthly basis to assess whether the customer is eligible to earn themudarabah profit. The account holder will be categorised as a mudarabah investor if he maintains the minimum average daily balance of RM3,000 andtherefore eligible to earn the profit (if any). However, the account holder will beconsidered as wadiàh yad dhamanah depositor if the minimum average daily balance is less than RM3,000. All terms and conditions regarding wadiàh yaddhamanah and mudarabah concepts are applicable according to the specifiedconditions and shall be agreed by the parties at the conclusion of the contract.

In this regard, the SAC was referred to on the issue as to whether the proposedcurrent account product based on wadiàh yad dhamanah and mudarabah contracts is allowed by the Shariah.

HYBRID PRODUCTS 155SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

Resolution

The SAC, in its 5th meeting dated 30 April 1998, has resolved that the proposed current account product based on wadiàh yad dhamanah and mudarabah contracts is permissible.

Basis of the Ruling

The usage of collective numbers of several Shariah contracts in a financial productor service is permissible based on the opinion that the collective numbers of contracts in a system is allowed provided that each contract is permissible and thereis no Shariah evidence that prohibits it.158 However, the usage of collective numbersof contracts should satisfy the Shariah requirements as follows:

i. The combination is not prohibited by Shariah, for example, prohibition to combine sale and loan contracts (al-bai` wa al-salaf) or it will not lead to riba(zariàh ila riba) such as the combination of loan and exchange contracts (al-jamù baina àqd al-qardh wa àqd al-muàwadhah); and

ii. Free from any conflicting elements in terms of Shariah rulings between proposedcontracts such as the combination of hibah and sale or hibah and lease of certain goods to the counterparty.

95. Deposit Product Based on Mudarabah and Qard Contracts

An Islamic financial institution proposed a deposit product based on collective usageof mudarabah contract (e.g. 60%) and qard (e.g. 40%). The proportion of bothcontracts would commence from the opening date until the closing date of the account. Every cash withdrawal from the account would represent 60% from themudarabah fund and 40% from the qard fund.

158 Hasan Ali al-Syazili, Ijtima` al-Ùqud al-Mukhtalifah al-Ahkam fi Àqd Wahid, in A`maal al-Nadwah al-Fiqhiyyah al-Khamisah li Bait Tamwil al-Kuwaiti, Bait al-Tamwil al-Kuwaiti, 1998, p. 506.


The proposed collective usage of mudarabah and qard contracts in a deposit product was referred to the SAC to ascertain its permissibility.

Resolution

The SAC, in its 51st meeting dated 28 July 2005, has resolved that the proposed collective usage of mudarabah and qard contracts in a depositproduct is permissible.

Basis of the Ruling

The aforesaid SAC resolution is based on the permissibility to use several Shariahcontracts in a single financial product as stated in item 94.159

96. Deposit Product Based on Wadiàh and Mudarabah Contracts

An Islamic financial institution proposed to offer a deposit product based onwadiàh and mudarabah contracts in order to enable the payment of dividendsto depositors. Under the proposed structure of the product, an Islamic financialinstitution would accept substantial proportion of customer’s deposits (for example 70%) based on wadiàh contract and the remaining (for example 30%)would be based on mudarabah contract. The profit generated from the investment will be shared according to the agreed profit sharing ratio and losses(if any) arising from investment will be borne by the customer.

The proposed deposit product based on wadiàh and mudarabah contracts wasreferred to the SAC to ascertain its permissibility.

159 Current Account Product Based on Wadiàh Yad Dhamanah and Mudarabah Contract.


Resolution

The SAC, in its 68th meeting dated 24 May 2007, has resolved that the proposed deposit product based on wadi`ah and mudarabah contracts ispermissible.

Basis of the Ruling


97. Financing Product for House under Construction Based on Istisna`Muwazi, Ijarah Mawsufah fi al-Zimmah and Ijarah Muntahia bi al-Tamlik

An Islamic financial institution proposed a financing product for house under construction based on the concepts of istisna` and ijarah mawsufah fi al-zimmah.The modus operandi of the financing commences with the customer signing thesale and purchase agreement with the developer and pays a deposit equivalent to10% of the house’s selling price. Subsequently, the customer will apply for a financing facility from an Islamic financial institution based on istisna` contractwhereby the customer will sell the house to the Islamic financial institution basedon istisna` contract (istisna` muwazi or parallel istisna`).

The customer will also enter into ijarah mawsufah fi al-zimmah contract to leasethe house, which is still under construction. In this regard, the customer agreed tocommence paying monthly rent even though the house is still under construction.



Based on the istisna` contract, the Islamic financial institution will settle the purchase price of the house to the customer by crediting the payable amount tothe customer’s special account. Subsequently, the Islamic financial institution willperform the role of an agent to the customer to make progressive payments fromthe customer’s special account to the house developer.

Once the construction is completed, the Islamic financial institution will continueto lease the house to the customer under ijarah muntahia bi al-tamlik contract.The Islamic financial institution may hibah the house to the customer once thecustomer has settled the final rental payment.

In this regard, the SAC was referred to on the issue as to whether the proposedfinancing for house under construction is permissible.

Resolution

The SAC, in its 68th meeting dated 24 May 2007, has resolved that theproposed house financing product based on istisna` muwazi, ijarah mawsufah fi al-zimmah and ijarah muntahia bi al-tamlik is permissible.

Basis of the Ruling




Entity A proposed to issue sukuk based on BBA with fixed income feature to financethe purchase of debts arising from Islamic house financing and Islamic hire-purchasefrom Islamic financial institutions. The modus operandi for the proposed Sukuk BBAis as follows:

i. Entity A will buy Mudarabah Interbank Investment which will be used as theunderlying asset in the sale and buy back contract between entity A and the investors;

ii. Entity A will sell the underlying asset (Mudarabah Interbank Investment) to theinvestors on cash term and subsequently purchase the same asset on deferredpayment term at a higher price;

iii. The proceeds from the cash sale of the underlying asset will be used by entityA to purchase the debts arising from Islamic house financing and Islamic hire-purchase; and

iv. The second transaction which involves the purchase of the same underlyingasset on deferred payment term by entity A results in the creation of debt obligation, and as evidence to this indebtedness, entity A will issue Sukuk BBAto the investors.

98. Mudarabah Interbank Investment as Underlying Asset in a Deferred Payment Sale

The SAC was referred to on the issue as to whether the Mudarabah Interbank Investment may be used as an underlying asset in a deferred payment transaction.

Resolution

The SAC, in its 41st meeting dated 8 March 2004, has resolved that the Mudarabah Interbank Investment may be used as an underlying asset in adeferred payment sale transaction.

SUKUK BASED ON BAI`BITHAMAN AJIL (BBA)



Basis of the Ruling

Although the Mudarabah Interbank Investment which is used as an underlyingasset in the Sukuk BBA does not exist physically, it satisfies the criteria of “existed”asset (by implication) and is recognised as tradable asset. This is based on thecharacteristics of the instrument which are valuable, tradable and transferable.

99. The Existence of Underlying Asset Throughout the Sukuk Maturity Tenure

The SAC was referred to on the issue as to whether the underlying asset whichis the Mudarabah Interbank Investment must exist throughout the Sukuk BBAmaturity tenure.

Resolution

The SAC, in its 41st meeting dated 8 March 2004, has resolved that theunderlying asset which is the Mudarabah Interbank Investment may notnecessarily exist throughout the Sukuk BBA maturity tenure.

Basis of the Ruling

The underlying asset is only used to perform the sale and purchase contracts (bai``inah). Subsequently, the ownership of the underlying asset may return to theoriginal owner. In this case, the Shariah does not require that the underlying assetto exist throughout the sukuk maturity tenure, except that the ownership of theunderlying asset must belong to the original seller and is transferable at the timeof the contract.

In addition, the Sukuk BBA mechanism is an asset-based sukuk and not an asset-backed sukuk.

100. Bidding Methods for the Sukuk BBA

Entity A proposed three bidding methods for Sukuk BBA, namely:

i. Bidding method based on price - All biddings will be arranged and separated indescending manner from the highest price to the lowest price until the wholeamount of Sukuk BBA offered are fully subscribed;

ii. Bidding method based on rate of return - All biddings will be arranged and separated in ascending manner from the lowest rate of return to the highestrate of return until the whole amount of Sukuk BBA offered are fully subscribed.The rate of return for Sukuk BBA issuance will be determined based the highestrate of return for the successful investor; or

iii. Bidding method based on weighted average rate of return - All biddings will bearranged and divided in ascending manner from the lowest rate of return tothe highest rate of return until the whole amount of Sukuk BBA are fully subscribed. The rate of return or coupon for Sukuk BBA issuance will be determined based on weighted average rate of return for the successful bidding.

Resolution

The SAC, in its 42nd meeting dated 25 March 2004, has resolved that all thethree proposed methods for Sukuk BBA bidding are permissible.

Basis of the Ruling

The practice of bidding resembles the features of sale and purchase by auction (bai`muzayadah). The contemporary scholars are of the opinion that bai` muzayadah ispermissible.162 All the aforesaid three methods of bidding as presented do not involve any element which contradicts the Shariah principles (mani` syar`ie). Thus,all the methods may be implemented.




PART IV: SHARIAH ISSUES IN RELATION TO THE OPERATIONS OF SUPPORTING INSTITUTIONS IN ISLAMIC FINANCE

Credit Guarantee Corporation (Malaysia) Berhad (CGC) was established in 1972with the objective of assisting small and medium businesses with no or insufficientcollaterals to obtain financing from financial institutions by providing guaranteecovers for the financing. CGC structures and manages guarantee schemes, specifically to assist small and medium entrepreneurs, as well as to ensure activeinvolvement of financial institutions in the implementation of its guaranteeschemes.

101. Shariah Concept for the Operation of Islamic Guarantee Facilityby Credit Guarantee Corporation

In view of the enhanced role of Islamic financial institutions in providing financingfor small and medium enterprises, CGC proposed to offer Islamic credit guaranteefacility to asset borrowers to obtain financing offered by the Islamic financial institutions. The credit guarantee facility offered is a guarantee with fee wherethe guaranteed party (customer) is required to pay a certain fee to the guarantor(CGC).

In this regard, the SAC was referred to on the issue as to whether the credit guarantee facility with fee offered by CGC is allowed by Shariah.

Resolution

The SAC, in its 54th meeting dated 27 October 2005, has resolved that thecredit guarantee facility with fee offered by CGC for financing granted byIslamic financial institutions is permissible.

CREDIT GUARANTEE CORPORATION (M) BERHAD


163 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami,1986, no. 2, v. 2, p. 1146 – 1147; Nazih Kamal Hammad,Mada Jawaz Akhzu al-Ajr ̀ ala al-Kafalah fi al-Fiqh al-Islami, Journal of King Abdul Aziz University (Islamic Economics),1997, v. 9, p. 95 -121.

164 Shariah Advisory Council of Securities Commission Malaysia, Resolutions of the Securities Commission Shariah Advisory Council (Second Edition), Securities Commission Malaysia, 2006, p. 44 – 45.

165 Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuh,Dar al-Fikr, 2002, v. 6, p. 4178.166 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1986, no. 2, v. 2, p. 1146 – 1147.167 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1986, no. 2, v. 2, p. 1134 – 1135.

Basis of the Ruling

The permissibility of guarantee facility with fee (kafalah bi al-ujr) offered by CGC isbased on the following considerations:

i. Some contemporary Shariah scholars163 and Shariah Councils164 has resolved thatthe imposition of ujrah on kafalah is permissible. A few contemporary scholars further opined that ujrah charged on kafalah shall be permitted on the basis ofmaslahah and public needs because in the current context, it is difficult and impractical to obtain free-of-charge guarantee.165 Moreover, one of the contemporary scholars, in his presentation to the OIC Fiqh Academy, had expressed his view that ujrah charged on dhaman (guarantee) is permissible. Heis of the view that although originally dhaman is a type of tabarru`, the conditionto charge ujrah on the dhaman is considered valid. He further reiterated thatdhaman contract is not considered as qard as it falls under istithaq contract.Thus, receiving ujrah for the guarantee service is not prohibited as dhaman contract is different from qard contract166; and

ii. Qiyas on akhz al-ajr `ala al-jah (to charge fee for someone’s reputation) andakhz al-ju`l ̀ ala ruqyah min al-Quran (to charge fee on the treatment/medicationusing Quranic verses). Some classical scholars permitted imposition of fee inboth situations and this permissibility could be extended to the imposition ofujrah on guarantee as both have similarities in terms of the services provided.167


102. Guarantee on the Sale Price

The SAC was referred to on the issue as to whether CGC may guarantee the saleprice including the profit margin of an Islamic financing.

Resolution

The SAC, in its 55th meeting dated 29 December 2005, has resolved thatit is permissible for CGC to guarantee the sale price including the profitmargin of an Islamic financing that is based on sale and purchase contract.

Basis of the Ruling

As the credit guarantee offered by CGC is on debt or financial obligation of anIslamic financing customer, a guarantee mechanism based on the outstandingselling price is reasonable since it is recognised by the current banking practicewhereby the outstanding debt is equal to the remaining debt or the selling priceafter deducting the rebate value (ibra’) due to the customer at a certain point oftime.


Danajamin Nasional Berhad (Danajamin) was established in 2009 as a national financial guarantee institution to maintain market confidence in bond markets (including sukuk) and to ensure that viable companies have access to financing viabond markets. Apart from providing credit enhancements to corporations with viable businesses, Danajamin also establishes investment grade ratings to facilitatethe corporations in obtaining funds from bond markets at a reasonable cost.

103. Shariah Concept for the Operation of Guarantee Facility by Danajamin Nasional Berhad

Under the guarantee facility mechanism by Danajamin, Danajamin undertakes topay the investors in the event the sukuk issuer fails to make good such payment.Subsequently, Danajamin will claim the amount paid to the investors from the sukukissuer.

In this regard, the SAC was referred to ascertain the appropriate Shariah conceptfor the operation of guarantee facility by Danajamin.

Resolution

The SAC, in its 10th special meeting dated 9 April 2009 and 95th meetingdated 28 January 2010, has resolved that:

i. The application of kafalah bi al-ujr (guarantee with fee) as the appropriateShariah concept for the guarantee facility on the sukuk issuance by Danajamin is permissible. Under this concept, Danajamin shall act as theguarantor (kafil), the sukuk issuer as the guaranteed party (makful ̀ anhu)and the investors as the beneficiary (makful lahu); and

ii. Danajamin is allowed to claim back the amount that has been paid tothe investors from the sukuk issuer through this guarantee facility. Therepayment period for the amount claimed by Danajamin from the sukukissuer shall be based on the current market practice subject to obtainingthe consent of contracting parties namely Danajamin and the sukuk issuer, and it shall take into consideration the size of the sukuk.

DANAJAMIN NASIONALBERHAD



168 Shariah Concept for the Operation of Islamic Guarantee Facility by Credit Guarantee Corporation.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the permissibility of guarantee facilitywith fee (kafalah bi al-ujr) as stated under item 101.168

104. Capital Segregation in the Operation of Danajamin

As Danajamin provides guarantee facility for both sukuk and conventional bond,the SAC was referred to on the issue as to whether Danajamin’s capital for guarantee facility services on the sukuk and conventional bond should be segregated. This was due to the concern that the capital segregation might limitDanajamin’s capacity to efficiently and effectively provide guarantee facility forboth sukuk and conventional bond.

Resolution

The SAC, in its 10th special meeting dated 9 April 2009, has resolved thatDanajamin’s capital for guarantee facility services for sukuk and conventional bond need not be segregated. However, the fund obtainedfrom the services of guarantee facility for sukuk and conventional bond(with fee) shall be separated.

Basis of the Ruling

Danajamin’s capital management for guarantee facility services for sukuk andconventional bond need not be segregated on the basis of maslahah, so as toensure Danajamin is able to carry its function as a guarantor in effectively stimulating growth and stability of the capital market, including the Islamic capitalmarket. In addition, capital segregation will only limit the capacity of this guarantee institution to effectively and efficiently provide guarantee facility onsukuk and conventional bond.

105. Scope of Danajamin’s Guarantee on Sukuk

The SAC was referred to ascertain the scope of guarantee by Danajamin on thesukuk issuer, specifically on the issue as to whether Danajamin may guarantee capital and profit value.

Resolution

The SAC, in its 10th special meeting dated 9 April 2009, has resolved that:

i. For sale-based sukuk like murabahah, Danajamin shall guarantee bothcapital and profit value; and

ii. For sukuk issued based on isytirak contract (partnership) like musyarakah,mudarabah and wakalah bi al-istithmar, Danajamin shall guarantee thecapital value only.

Basis of the Ruling

For sukuk issued based on isytirak contract like musyarakah, mudarabah andwakalah bi al-istithmar, Danajamin as a third party may only guarantee the amountof capital. This is in line with the jurists’ view that third party guarantee is permissiblefor musyarakah, mudarabah and wakalah bi al-istithmar contracts but the guarantee is restricted only to the capital value.



106. Guarantee on the Obligation Arising from Purchase Undertaking

The SAC was referred to on the issue as to whether Danajamin may guaranteesukuk obligation arising from a purchase undertaking in sukuk as agreed betweenthe sukuk issuer and the investors.

Resolution

The SAC, in its 94th meeting dated 23 December 2009, has resolved thatDanajamin may guarantee the obligation of sukuk issuer arising from thepurchase undertaking in sukuk as agreed between the sukuk issuer andthe investors. However, the formula to determine the amount of purchaseundertaking shall exclude the unearned profit.

Basis of the Ruling

Fundamentally, the obligation of purchase undertaking in sukuk is valid and acknowledged by Shariah. This is because such obligation is derived from a binding promise (wa`d mulzim) by the sukuk issuer to purchase an underlyingasset of the sukuk based on agreed terms and conditions. In this regard, the guarantee on such obligation and responsibility may be executed either with orwithout fee.

107. Late Payment and Additional Recourse Charge

Normally, after Danajamin makes payment to the investors in the event of defaultby the sukuk issuer, Danajamin will claim the amount paid from the sukuk issuer.In order to avoid delay of the repayment by the sukuk issuer, the imposition of latepayment charge on the sukuk issuer who delays the repayment was proposed.

In this regard, the SAC was referred to on the following matters:

i. Whether late payment charge may be imposed on the sukuk issuer who delaysin repayment; and

ii. Whether Danajamin may impose additional charges on the sukuk issuer uponmaking the repayment to Danajamin.

Resolution

The SAC, in its 10th special meeting dated 9 April 2009 and 95th meeting on28 January 2010, has resolved that:

i. It is permissible to impose late payment charge on the sukuk issuer whofails to make repayment within the stipulated period. However, the latepayment charge shall be non-compounding;

ii. A certain amount of the late payment charge may be recognised as income by Danajamin on the basis of ta`widh. However, the determination of ta`widh rate shall be made by a third party namely BankNegara Malaysia; and

iii. The imposition of any other additional charges by Danajamin on thesukuk issuer upon claiming the guaranteed amount paid to the investorsis not allowed.



169 Imposition of Ta`widh and Gharamah in Islamic Financing Facilities.170 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Standard no. 19 (Al-Qard), paragraphs 4 and 5.

Basis of the Ruling

The aforesaid SAC’s resolution on late payment charge is based on the permissibility of ta`widh and gharamah as stated under item 81.169 In addition,the prohibition to impose additional recourse charge is based on the view thatthe payment of guarantee (kafalah) by Danajamin to the investors and the rightto claim such payment from the sukuk issuer would result in the guarantee toappear as a debt (qard) that is granted by Danajamin to the sukuk issuer. TheShariah stipulates that any additional charge on debt repayment is riba unlesssuch additional charge is imposed only to recover the actual cost incurred.170

108. Ownership of Underlying Asset in Sukuk Based on Ijarah Contract

In ijarah-based sukuk, the ownership of the underlying asset is held by the investors, while the sukuk issuer as the asset-lessee has the obligation to pay thecoupon which refers to periodic rental amount. The SAC was referred to on theissue as to whether the ownership of the underlying asset in sukuk ijarah will betransferred to the sukuk issuer or Danajamin in the event Danajamin exercises theguarantee by paying the rent and principal amount to the investors.

Resolution

The SAC, in its 10th special meeting dated 9 April 2009, has resolved that:

i. The ownership status of the underlying asset in sukuk ijarah is subjectto the terms and conditions of the contract. If Danajamin only pays theperiodic rental amount or coupon within the sukuk tenure, the underlying asset remains under the investors’ ownership. However, ifDanajamin pays the purchase undertaking price, the ownership of theunderlying asset will be transferred to the sukuk issuer. Notwithstandingthat, the asset will be regarded as a security or a collateral for the debtwhich has been paid by Danajamin to the investors, until the sukuk issuer repays the amount paid; and

ii. The guarantee on sukuk issued based on ijarah contract may cover guarantee on the rent as well as wa`d to purchase the asset.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the consideration that the effect of acontract is subject to the terms and conditions agreed in the contract as long asthey do not contravene any general principles of Shariah. This is in line with thefollowing fiqh maxim:

“The original rule of a contract is the mutual consent or agreement by both contracting parties and the consequence of the contract is based on (rights and responsibilities) agreed in the contract.”171



MALAYSIA DEPOSIT INSURANCE CORPORATION

The Malaysia Deposit Insurance Corporation (PIDM) was established in 2005 toprovide Islamic and conventional deposit insurance. The initiative to establish deposit insurance system aims at strengthening the consumer protection infrastructure as one of the main agendas in the ongoing development of theMalaysian financial system. The deposit insurance system will strengthen incentivesfor financial institutions to adopt sound financial and business practices and enhance public confidence in the financial system by providing explicit protectionof deposits.

109. Shariah Concept for the Operation of Islamic Deposit Insurance

Deposit insurance is a mechanism that enables PIDM to protect depositors againstloss of their deposits placed with banking institutions in the unlikely event of abank failure. So as to enable the depositors of Islamic banking institutions to enjoythe same protection, the SAC was referred to ascertain the appropriate underlyingShariah concept for the operation of Islamic deposit insurance.

Resolution

The SAC, in its 80 meeting dated 7 January 2009, has resolved that theapplication of kafalah bi al-ujr (guarantee with fee) as the underlyingShariah concept for the operation of PIDM in managing Islamic deposit insurance fund is permissible.172 Based on the concept of kafalah bi al-ujr,the premium paid by the member institutions of PIDM offering Islamicbanking services is considered as an ujrah or fee for PIDM and thus, belongsto PIDM. As premium is considered as fee, PIDM may structure it in theform of absolute or proportionate value.

Basis of the Ruling

The aforesaid resolution by the SAC has considered the permissibility of kafalahbi al-ujr as stated in item 101.173

172 This resolution supersedes the previous resolution made by the SAC in the 26th meeting dated 26 June 2002which held that the suitable Shariah concept for the operations of Islamic deposit insurance is tabarru`.

173 Shariah Concept for the Operation of Islamic Guarantee Facility by Credit Guarantee Corporation.


110. Commingling of Funds Contributed by Islamic and ConventionalBanking Institutions in Deposit Insurance

Under the deposit insurance arrangement, Islamic and conventional banking institutions are required to be members of PIDM and pay the annual premium thatserves as a source of fund for the deposit insurance scheme. Apart from beingutilised to make payment to the insured depositors in the event of winding-up ofany banking institution, the fund is also used for investment in Shariah compliantinstruments as well as to defray the expenses of PIDM.

In this regard, the SAC was referred to on the issue as to whether the accumulationof premium contributed by Islamic and conventional banking institutions into onesingle fund is allowed by the Shariah.

In addition, the SAC was also referred to on the issue as to whether the Government may make it mandatory for all Islamic banking institutions to be members of PIDM.

Resolution

The SAC, in its 26th meeting dated 26 June 2002, has resolved that the premium or fee contributed by Islamic and conventional banking institutionsshall be segregated and shall not be accumulated into one single fund. Inthe event of dissolution of PIDM, the SAC, in its 29th meeting dated 25 September 2002, has resolved that two separate liquidation processes forboth funds shall be executed.

In addition, the SAC, in its 80th meeting dated 7 January 2009, has also resolved that the Government may make it mandatory for all Islamic bankinginstitutions to be members of PIDM as there is no Shariah impediment forthe imposition of such requirement.


Basis of the Ruling

The premium or fee contributed by Islamic and conventional banking institutionsshall be segregated to avoid commingling of funds between Islamic and conventional deposit insurance schemes. This is also to ensure that the Islamicdeposit insurance fund is invested in Shariah compliant instruments. The commingling of premium funds of Islamic and conventional banking may raiseuncertainties on the Shariah compliance status of the Islamic banking premiumfund. Separate liquidation processes shall also be executed in order to ensure thatthe rights and priority in the payment of the protection are accorded to the rightful parties.

111. Guarantee Limit for Islamic Banking Deposits by PIDM

In executing the guarantee on Islamic banking deposits, the SAC was referred toon the issue as to whether PIDM may guarantee the principal value as well as theprofit realised but not yet distributed by the Islamic banks.

Resolution

The SAC, in its 29th meeting dated 25 September 2002, has resolved thatthere is no restriction on the execution of guarantee on wadi`ah deposit.Mudarabah deposit, however shall only be guaranteed by a third party (inthis situation, it may refer to PIDM). However, the insurance deposit shallnot give priority to guarantee mudarabah profit that has not been declared.

Basis of the Ruling

The aforesaid resolution of the SAC is based on the following considerations:

i. PIDM may limit the guarantee coverage as it is in line with the principle ofkafalah that allows the kafil to determine the guarantee limit;174



ii. There is no Shariah impediment in executing guarantee on deposit based onwadi`ah; and

iii. Deposit insurance should not give priority to guarantee mudarabah profit thathas not been declared as it should be used to settle the claims and liabilities ofhigher priority.

112. Definition of Term “Deposit” in Islamic Deposit Insurance

As the date of winding up of an Islamic banking institution might take place evenbefore the payment of monthly declared profit/hibah, the SAC was referred to ascertain the definition of deposit payable to the depositors in the event of windingup of an Islamic banking institution.

Resolution

The SAC, in its 30th meeting dated 28 October 2002, has resolved that thedefinition of deposit that is payable in the event of winding up of an Islamicbanking institution refers to the principal amount plus the profit/hibahwhichhas been credited into the account, including declared profit/hibah but notyet credited until the date of winding up of the Islamic banking institution.Nevertheless, any additional value (whether termed as profit/hibah) for theperiod between the winding up date and the date of payment is subject tothe discretion of PIDM.

In addition, the SAC has also resolved that the value guaranteed by PIDMshall be clearly stated in the `aqad or contract.


Basis of the Ruling

The aforesaid SAC’s resolution is based on the consideration that the criteria anddefinition of the term “deposit” may be determined based on the common practice of the financial industry. This is in line with the following fiqh maxims:

175 Ahmad al-Zarqa’, Syarh al-Qawaìd al-Fiqhiyyah, Dar al-Qalam, 1989, p. 237.176 Ahmad al-Zarqa’, Syarh al-Qawaìd al-Fiqhiyyah, Dar al-Qalam, 1989, p. 239.

“Something which has been identified as a custom is considered like a stipulatedcondition.”175

“Something which has been acknowledged as common practice among thetraders is considered as agreed condition among them.”176

113. Status of PIDM’s Claim Against Depositors’ Claim in the Event ofWinding up of an Islamic Banking Institution

Upon winding up of an Islamic banking institution and its inability to fulfill its obligation to return the deposit to the depositors, PIDM will pay the depositorseither partial or the whole amount of the deposits from the Islamic deposit insurance fund. Subsequently, PIDM will claim the amount paid from the Islamicbanking institution.

In this regard, the SAC was referred to ascertain the status of PIDM’s claim againstthe depositors’ claim in getting refund from the Islamic banking institution.

Resolution

The SAC, in its 26th meeting dated 26 June 2002, has resolved that the priority of PIDM’s claim against the depositor’s claim in getting refund inthe event of winding up of an Islamic banking institution would dependon the type of deposit paid by PIDM. For example, if PIDM paid for guaranteed wadiàh deposit, PIDM’s claim is considered equal to wadiàhdepositors and so forth.


Basis of the Ruling

Deposit products of Islamic banking institutions are structured based on differenttypes of contracts, hence, leading to different legal consequences. The priority ofrepayment of the deposits, therefore, depends on the àqad or contractual relationship concluded between the depositor and the Islamic banking institution.

Since wadiàh as practised by the Islamic banking institutions has the same effectof qard from fiqh perspective, the Islamic banking institutions are obliged to guarantee and return the whole amount deposited into the wadiàh account.177

For mudarabah-based deposit, the Islamic banking institutions are not obliged toguarantee or refund the whole amount of mudarabah capital or the profit178, unlessthe loss incurred is due to the negligence or mistake on the part of the financial institution as the mudarib.

Notwithstanding the above, based on the contract of kafalah bi al-ujr concludedby PIDM and the Islamic banking institutions, PIDM bears the responsibility to guarantee mudarabah loss on the basis of third party guarantee. In this regard, theIslamic banking institutions are obliged to give priority to satisfy the right of wadiàhaccount depositors before the mudarabah account depositors. This is because theIslamic banking institutions owe direct responsibility towards the wadiàh accountdepositors.

177 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1995, 9th Convention, resolution no. 86 (9/3).178 OIC Fiqh Academy, Majallah Majma` al-Fiqh al-Islami, 1995, 9th Convention, resolution no. 86 (9/3).


114. Application of Muqasah in Islamic Deposit Insurance

Usually, after an Islamic banking institution has been declared insolvent, an offset(muqasah) process will take place to determine the amount of deposit that shouldbe paid by PIDM to the depositors. Under this process, the payable amount willbe determined based on the difference between the deposit amount and the outstanding amount of financing or debt owed by the customer to the Islamicbanking institution. For example, if a customer has a deposit of RM100,000 andat the same time, he has an outstanding financial or debt obligation of RM50,000,the customer is eligible to receive a payment of RM50,000 only.

In this regard, the SAC was referred to on the issue as to whether the offsetprocess between the depositors and the Islamic banking institution as illustratedabove is permissible in the process of deposit repayment by PIDM and the liquidator.

Resolution

The SAC, in its 32nd meeting dated 27 February 2003, has resolved thatthe offset process between the depositors and the Islamic banking institution is permissible to be applied in the process of deposit repaymentby PIDM and the liquidator.

Basis of the Ruling

In principle, muqasah is permissible in Islamic transactions. Muqasah can be carried out in two manners, namely, al-muqasah al-ittifaqiyyah (mutually agreedby both parties) and al-muqasah al-jabariyyah (determined by the authority to ensure justice). Most of the Islamic financial institutions have included an offsetclause in the Islamic financing agreements, and it is enforceable based on theconsent of the customer who signs the agreement. This is in line with the following fiqh maxim:

“The original rule of a contract is the mutual consent or agreement by both contracting parties and the consequence of the contract is based on (rights andresponsibilities) agreed in the contract.” 179



115. Mortgage Guarantee Facility

In order to enhance the securities market development, the National Mortgage Corporation or Cagamas has proposed to provide Islamic mortgage guarantee facility. The mortgage guarantee facility offers to the Islamic financial institutions,particularly the mortgage originators, a portfolio and risk management solution tomanage the credit risk exposure of their mortgage portfolio. This will subsequentlyenhance the capacity of the Islamic financial institutions to provide affordable mortgage financing to homebuyers. The mortgage guarantee facility would be offered through the establishment of a joint venture company, acting as a SpecialPurpose Vehicle (SPV).

The mortgage guarantee facility shall be based on wakalah and kafalah contractswhich are entered into independently. In the proposed structure of the mortgageguarantee facility, the SPV will carry the following two roles for the Islamic financialinstitutions:

i. Based on wakalah contract, the SPV shall act as an agent for the Islamic financialinstitutions to carry out certain services, with an agreed ujrah or fee, such asanalysing the risk of the mortgage financing portfolio; and

ii. Based on kafalah contract, the SPV shall act as a guarantor to undertake theloss of the Islamic financial institution in the event of default in the payment ofperiodic instalment by homebuyers. Kafalah is given with a recourse elementwhereby the SPV shall claim the guaranteed amount paid to the Islamic financialinstitutions from the customer. Nonetheless, no fee will be charged for the guarantee facility offered by the SPV.

In this regard, the SAC was referred to on the issue as to whether the above proposed structure of the mortgage guarantee facility is allowed by the Shariah.

Resolution

The SAC, in its 74th meeting dated 3 April 2008, has resolved that the proposed mortgage guarantee facility is permissible, provided that the facilityis agreed by the customer of the Islamic financial institution.

SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE182 NATIONAL MORTGAGE

CORPORATION (CAGAMAS)


Basis of the Ruling

The permissibility of wakalah has been stated in the al-Quran as follows:

“…let one of you go to the city with this silver coin and find food that is purestand lawful (that is sold there). Let him bring you provision from it...”180

The permissibility of wakalah has also been stated by Rasulullah SAW as narratedin the following hadith:

Narrated by ‘Uqbah ibn ‘Amir that Rasulullah SAW had given him several goatsto be distributed among his companion until a goat was left after the distribution.When he informed Rasulullah SAW about it, Rasulullah SAW said: Sacrifice it onmy behalf.”181

The permissibility of kafalah contract has also been stated in the al-Quran as follows:

180 Surah al-Kahfi, verse 19.181 Al-Bukhari, Sahih al-Bukhari, Al-Matba`ah al-Salafiyyah, 1982, v. 2, p. 207, hadith no. 2500.182 Surah Yusuf, verse 72.

“…and he who restores it shall be awarded a camelload (of food supply), and Ipledge my word for it.”182

183 Al-Baihaqi, Al-Sunan al-Kubra, Dar al-Kutub al-`Ilmiyyah, 2003, v. 6, p. 119.184 Kuwait Finance House, Al-Fatawa al-Syar`iyyah fi al-Masa’il al-Iqtisadiyyah (latest edition), v. 2, p. 29 – 30, fatwa

no. 384.

The permissibility of kafalah is also stated by Rasulullah SAW as narrated in the following hadith:

The collective numbers of Shariah contracts in a product or service is permissible,in line with contemporary fatwa that allows the collective numbers of variousShariah contracts in a transaction as long as it is not in contradiction with theShariah ruling. Moreover, such collective number of various Shariah contracts haslong been practised.184 What is important is that the contracts have to be implemented independently and do not fall among the contracts prohibited byShariah.

In addition, the customer’s consent for any mortgage guarantee with recourse element is required to ensure that the customer is aware about his responsibility topay the guaranteed amount to the SPV upon the latter’s claim.

“A guarantor is the one who bears the liability.”183



PART V: SHARIAH ISSUES IN ISLAMIC FINANCE

116. Priority of Depositors in Recovering Deposit in the Event of Winding Up of an Islamic Banking Institution

Islamic banking deposits use various types of Shariah concepts with different implications from one another (for example wadiàh and mudarabah). Generally,Islamic banking deposits can be classified into three main categories, namelywadiàh-based deposit, mudarabah-based deposit and deposits based on otherconcepts such as BBA and bai` ìnah.

In this regard, the SAC was referred to ascertain the priority of certain categoryof depositors over other depositors in recovering their respective deposits in theevent of winding up of an Islamic banking institution.

Resolution

The SAC, in its 26th meeting dated 26 June 2002 and 30th meeting dated28 October 2002, has resolved that in the event of winding up of an Islamicbanking institution, depositors’ priority in recovering their respective deposits in the Islamic banking institution is subject to the underlying contract or concept concluded with the Islamic banking institution.

In this regard, wadiàh and debt-based deposits are given priority over mudarabah-based deposit. Nevertheless, in order to meet the current legalrequirements under section 81 of the Bank and Financial Institutions Act1989, mudarabah-based deposit should be given priority over other creditors’ claim and other liabilities. This is because mudarabah-based deposit is regarded as deposit and has priority in terms of claims.

With regard to deposits other than wadiàh and mudarabah-based deposits(for instance, deposits based on murabahah and bai` ̀ inah concepts), thesedeposits are considered as having a similar status as wadiàh and mudarabah-based deposits in terms of definition. Thus, the priority of recovery is based on their underlying concept. In addition, these depositsshall be valued based on their face value at the date of winding up of theIslamic banking institution.

WINDING UP OF ISLAMICBANKING INSTITUTIONS


Basis of the Ruling

Please refer to basis of the ruling for issue 113.185

117. Surplus Sharing Post Liquidation and Payment of Claims betweenIslamic and Conventional Banking Funds

With regard to the winding up of conventional banking institutions offering IslamicBanking Scheme (IBS), the SAC was referred to on the issue as to whether the surplus from the liquidation and payment of claims in Islamic banking fund may beutilised to cover deficit in the conventional banking fund or vice versa.186

Resolution

The SAC, in its 26th meeting dated 26 June 2002 and 29th meeting dated 25September 2002, has resolved that any banking institution offering IBS shallexecute separate winding up process for its conventional and Islamic bankingfunds. Nevertheless, any surplus (after settlement of all liabilities) in one fund(conventional or Islamic) may be utilised to cover the deficit in the other fund.

Basis of the Ruling

The surplus from the liquidation process and claims payment in Islamic bankingfund can be used to cover the deficit in conventional fund and vice versa. This isbecause the owner of the company (which is the shareholder) is the same entityand is responsible to return the principal or capital to the depositors regardless ofwhether the deposits are Islamic or conventional.


185 Status of PIDM’s Claim Against Depositors’ Claim in the Event of Winding up of an Islamic Banking Institution.186 This issue is specifically applicable in the context of IBS only.

118. Status of Conventional Fund Placed in Mudarabah Special Investment Account in the Event of Winding Up of Banking Institutions

In 1995, Bank Negara Malaysia allowed IBS banking institutions to acquire fundsfrom conventional banking operations and to place the fund under MudarabahSpecial Investment Account for a minimum period of one year. This was to enableIBS banking institutions to provide Islamic financing facility in the event the institution is unable to obtain funds from the market.

In this regard, the SAC was referred to ascertain the status of such conventionalfund in the event of winding up of an IBS banking institution which is whether itis classified as mudarabah-based deposit or part of the shareholders’ fund.

Resolution

The SAC, in its 37th meeting dated 7 August 2003, has resolved that conventional fund placed in Mudarabah Special Investment Account is classified as mudarabah deposit and does not form part of the shareholders’ fund. Thus, the status of this Mudarabah Special InvestmentAccount is similar to the status of other mudarabah deposits in the eventof winding up of an IBS banking institution.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the consideration that the agreementconcluded between both parties is based on mudarabah and that the fund is intended for the purpose of mudarabah. In this regard, it carries the status of mudarabah in the event of winding up of the IBS banking institution.


119. Method for Profit Distribution

In the current financial practices, the distribution of profit between the Islamic financial institution and customer is made at the gross profit level, which is theprofit for the whole operation after deducting all direct expenses for all investmentfunds and the deposits received. The amount of net profit of the Islamic financialinstitution will be determined after deducting its operating expenses from the grossprofit portion received by the Islamic financial institution.

In this regard, the SAC was referred to on the issue as to whether the profit distribution method which is calculated based on gross profit is permissible.

Resolution

The SAC, in its 16th meeting dated 11 November 2000, has resolved thatthe profit distribution method based on gross profit is permissible.

Basis of the Ruling

The profit distribution method based on gross profit is aimed to safeguard the customers’ interest as investors or depositors since the financial institutions haveto bear their own operating expenses. In musyarakah contract, the contracting parties may agree to choose either gross profit or net profit as the method for profitdistribution.187 As for the mudarabah contract, the majority of scholars are of theopinion that the mudarib shall bear all indirect expenses. Therefore, profit distribution method at the gross profit level is in line with the aforesaid requirement.

ACCOUNTING AND REPORTING STANDARDS IN ISLAMIC FINANCE

187 Muhammad Taqi Usmani, An Introduction to Islamic Finance, Idara Isha`at at-e-Diniyat, 1999, p. 66.



188 Majmu`ah Dallah Barakah, Fatawa Nadawat al-Barakah, 1981 – 1997, p. 134, fatwa no. 8/2.189 Surah al-Baqarah, verse 282.

”O believers! When you contract a debt from one another for a fixed period, putit (its amount and period of repayment) in writing. And let a scribe write it downbetween you justly (truthfully)...”189

120. Method for Revenue Recognition

The SAC was referred to on the issue as to whether Islamic financial institutionsmay adopt accrual method to recognise revenue.

Resolution

The SAC, in its 16th meeting dated 11 November 2000, has resolved thatthe accrual method for revenue recognition is permissible.

Basis of the Ruling

According to Shariah, both cash and accrual methods are acceptable in recognising the revenue. In the context of current practices, the accrual methodis preferable due to the changes in commercial practices that have become morediversified and varied.

Accrual method is permissible on the basis that a party is entitled to the realisedrevenue even though it has not been received in cash yet.188 In view of its effectiveness in recording credit transactions, the accrual method is regarded asconsistent with Islam that ordains credit transactions (such as sale with deferredpayment) to be properly recorded. This is line with the following verse of the al-Quran:

“(Decrees of) transaction goes around based on custom of a particular state andambience of a place.”190

190 Ali Ahmad al-Nadwi, Jamharah al-Qawa`id al-Fiqhiyyah fi al-Mu`amalat al-Maliyyah, Syarikah al-Rajhi al-Masrafiyyahli al-Istithmar, 2000, v. 2, p. 951.

121. Application of “Substance over Form” Principle in Islamic Finance

“Substance over form” is an accounting principle that emphasises on the financialreality of a particular transaction rather than its legal form. It also refers to financialreporting that records the whole economic effects of a transaction, or a series ofrelated transactions, instead of reporting it merely from disjunctive contracts orlegal perspective.

For instance, in a sale and buy back contract, the financial reporting will record theoverall effect of all contracts involved in the transaction, whereby the profit generated from the contracts will be recorded as the financing cost payable by thefinancee.

In this regard, the SAC was referred to on the issue as to whether the applicationof “substance over form” principle in Islamic financial reporting is permissible.

Resolution

The SAC, in its 57th meeting dated 30 March 2006 and 71st meeting dated26 - 27 October 2007, has resolved that in principle, “substance” and“form” are equally important and highly taken into consideration by theShariah. In this regard, the Shariah emphasises that “substance” and “form”must be consistent and shall not contradict one another. In the event of inconsistency between “substance” and “form” due to certain factors, theShariah places greater importance on “substance” rather than “form”.

Notwithstanding the above, there is no Shariah objection on the adoption of theaccrual method and this is consistent with the necessity (hajah) that arises fromcurrent practices. In addition, it is also in line with the following fiqh maxim:



191 Ahmad al-Zarqa’, Syarh al-Qawaìd al-Fiqhiyyah, Dar al-Qalam, 1989, p. 47.192 Ali Ahmad al-Nadwi, Jamharah al-Qawaìd al-Fiqhiyyah fi al-Muàmalat al-Maliyyah, Syarikah al-Rajhi

al- Masrafiyyah li al-Istithmar, 2000, v. 1, p. 550.

Basis of the Ruling

In current Islamic finance contexts, most of the underlying contracts in financialproducts, especially financing products, are contemporary contracts (ùqud mustajiddah). These new contracts contain collective elements derived from different traditional contracts (ùqud musamma) and the elements are binding onone another in a certain manner. The absence of any of the elements would curtailthe objective of the contract. Independent reporting of a series of transactionsinvolved in this new contemporary contract would raise ambiguity in the overalltransactions. Therefore, there is a need to record the series of transactions involved in the new contract as one transaction only. This is based on the application of “substance over form” principle.

The aforesaid consideration is also in line with the following fiqh maxim and theobjective of the Shariah:

“Matters are determined according to intentions.”191

“In contracts, effect is given to intention and meaning and neither words norforms.”192

122. Application of Probability Principle

The principle of probability refers to the practice of recording transaction althoughthe contract has not yet been completely concluded. In this regard, assets will berecorded once there is a probability of economic resources inflow whilst liabilitywill be recorded once there is a probability of economic resources outflow due tocurrent obligation and its amount can be estimated with certainty. Instances ofitem recorded based on the principle of probability is wa`d (whether it is a bindingpromise or non-binding promise) and provision for impairment. Nevertheless, suchpractice is not meant to equalise promise and contract (aqad). Instead, it is aimedat notifying on the economic effect upon the execution of the arrangement.

193 Al-Amidi, Al-Ihkam fi Usul al-Ahkam, Dar al-Kitab al-Àrabi, 1983, v. 3, p. 317.194 Al-Ghazali, Al-Mustasfa fi Ìlm al-Usul, Dar al-Kutub al-Ìlmiyyah, 1992, p. 286.195 Ahmad al-Zarqa’, Syarh al-Qawaìd al-Fiqhiyyah, Dar al-Qalam, 1989, p. 151.196 Al-Ansari, Asna al-Matalib fi Syarh Rawd al-Talib, Dar al-Kutub al-Ìlmiyyah, 2000, v. 2, p. 2154.197 Ahmad al-Zarqa’, Syarh al-Qawaìd al-Fiqhiyyah, Dar al-Qalam, 1989, p. 235.198 Ali Ahmad al-Nadwi, Jamharah al-Qawaìd al-Fiqhiyyah fi al-Muàmalat al-Maliyyah, 2000, v. 1, p. 468.199 Al-Amidi, Al-Ihkam fi Usul al-Ahkam, Dar al-Kitab al-Àrabi, 1983, v. 3, p. 317.

In this regard, the SAC was referred to on the issue as to whether the principle ofprobability in Islamic financial reporting is permissible.

Resolution

The SAC, in its 71st meeting dated 26 - 27 October 2007, has resolved thatthe application of probability principle in Islamic financial reporting is permissible as it does not contradict the general fiqh principles.

Basis of the Ruling

Some scholars are of the view that strong presumption (zan al-ghalib) may be takeninto consideration in ascertaining a ruling. This has been discussed by a number ofscholars such as Al-Amidi193, Al-Ghazali194 and Mustafa Al-Zarqa’195.

In addition, the permissibility to apply the principle of probability in Islamic financialreporting is based on the following fiqh maxims:

“The original state of thing is permissible.”196

“Consideration is based on the prevailing practice and not on the isolated cases.”197

“Whatever is close to something it would take the same ruling.”198

“Presumption shall be followed.”199



123. Application of Time Value of Money Principle

The concept of time value of money refers to the difference in value of moneyreceived in cash vis-à-vis the value of money received on deferred basis in future.The difference between cash and deferred price is usually termed as revenue orexpenditure of the financing.

In this regard, the SAC was referred to on the issue as to whether the applicationof time value of money principle in Islamic financial reporting is permissible.

Resolution

The SAC, in its 71st meeting dated 26 - 27 October 2007, has resolved thatthe application of time value of money principle in Islamic financial reporting is permissible only for exchange contracts that involve deferredpayment. However, it is strictly prohibited in debt-based transactions (qard).

Basis of the Ruling


i. There are discussions by jurists that allow higher deferred selling price as compared to cash selling price200, indicating that time factor may be takeninto consideration in determining the selling price.

In addition, Al-Kasani highlighted that any item that is purchased on deferredpayment (al-ajl) is not allowed to be sold on murabahah basis unless the potential buyer is informed that the item has been purchased on deferredbasis.201

200 Al-Syawkani, Nail al-Awtar, Dar al-Ma`rifah, 2002, v. 2, p. 1072; Al-Kasani, Badaì al-Sanaì fi Tartib al-Syaraì, Dar Ihya’ al-Turath al-Àrabi, 2000, v. 4, p. 466.

201 Al-Kasani, Badaì al-Sanaì fi Tartib al-Syaraì, Dar Ihya’ al-Turath al-Àrabi, 2000, v. 4, p. 466:

202 Al-Sarakhsi, Al-Mabsut, Dar al-Fikr li al-Tiba`ah wa al-Nashr, v. 13, p. 64:


ii. Al-Sarakhsi also highlighted similar view as follows:

“Certainly something which is deferred is lower in terms of value as comparedto something which is on spot.” 202

The above Sarakhsi’s view shows that the present time is higher in value as compared to the future. Thus, pricing in deferred sale should be marked up so asto ensure justice to the contracting parties particularly the seller who has to sacrificethe present consumption of money as the payment is not made in cash.

Al-Kasani explains that if a sale involves deferred payment, such deferment warrantsconsideration (`iwad) in a form of money by way of price mark-up. However, thepermissibility is limited to sale transactions only, while in debt-based transactions(qard), consideration in terms of money is not allowed for the deferment as it wouldtantamount to riba nasi’ah which refers to money begets money (al-naqd yalid al-naqd).

However, it does not mean that Islam does not recognise time value of money indebt-based contract. This is because deferment in this contract is given consideration in terms of multiple rewards in the Hereafter, in line with its underlying principle of ihsan. On the other hand, sale and purchase contracts whichare based on justice principle may accept increase in price due to the deferment.

Apparently, should the principles of ihsan and justice be compared, ihsan wouldbe of higher status than justice given that the former receives great reward in theHereafter which is better than monetary reward.203

203 Al-Ghazali explained as follows:

204 Al-Bahuti, Kasshaf al-Qina` `an Matn al-Iqna`, Dar al-Fikr, 1982, v. 3, p. 496.

124. Deposit or Customer’s Investment Fund from Doubtful Sources

The SAC was referred to on the issue as to whether Islamic financial institutionsmay accept application to open deposit account or investment account from acustomer (individual or corporate company) without conducting investigation toascertain whether the sources of the customer’s fund is permissible (halal), forbidden (haram) or a mixture of the two.

Resolution

The SAC, in its 58th meeting dated 27 April 2006, has resolved that Islamicfinancial institutions are allowed to accept application to open deposit account or investment account from a customer without conducting investigation to ascertain whether the sources of the customer’s fund arepermissible (halal), forbidden (haram) or a mixture of the two. Notwithstanding this, the SAC has no objection for Islamic financial institutions to establish an internal screening process to ascertain whetherthe sources of the fund received are Shariah compliant.

Basis of the Ruling

The aforesaid SAC’s resolution has considered the following evidences and fiqhmaxims:

i. Hadith of Rasulullah SAW:

“Al-Khalal reported based on narration from Ata’, he said, Prophet Muhammad SAW prohibited (Muslims) from running a partnership with Jewand Christian except if the transaction is under the supervision of the Muslim.”204

OTHER MATTERS 197SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

205 Al-Bukhari, Sahih al-Bukhari, Dar Ibn Kathir, 1987, v. 3, p. 1068, hadith no. 2756.206 Al-Syafii, Al-Umm, Bait al-Afkar al-Dawliyyah, (n.d.), p. 720.

This hadith indicates that Rasulullah SAW allows Muslims to enter into partnership (musyarakah) transactions with non-Muslims even though theirsources of fund are doubtful, provided that all the transactions or sales are underthe supervision of Muslims.

Apart from that, there are scholars who said that Rasulullah SAW would not beindebted to Jews who charge him interest. Instead, Rasulullah SAW was reported to have transacted in deferred payment transactions in which he hadsecuritised his shield. It is reported in the following hadith:

“From Aisyah (Allah Blessed her) said to the effect: On the day Prophet Muhammad SAW died, his shield was still mortgaged to a Jew for (his debtamounting to) 30 so` (a type of measuring tool) wheat owed to him.”205

ii. Since sources of funds in the present financial markets are complicated and diversified, Islamic financial institutions are exposed to the involvement of peoplewho possess property gained through illegal or doubtful sources. Therefore,even though the intention to disallow the inflow of illegal funds to the Islamicfinancial systems is praiseworthy, it is not incumbent on the Islamic financial institution to investigate the legality of the sources of funds received becauseof its impracticality to appraise. This approach is in line with the following fiqhmaxims which conclude that for matters which their true status are hard to determine, it is adequate for the appraisal to be based on its external appearance:

“Ruling of something is based on the external appearance, whereas internalmatter is left to Allah the All Knowing.” 206


“Ruling of something is based on the external factor, should it be impossibleto comprehend the actual meaning.” 207

“Hence, among the beauty of Shariah is the determination of legal rulingbased on the external factors, and deemed (these external factors) as an effective cause (illah), a ruling exists if the illah exists and vice versa.”208

“Muàmalah is based on the external factors, undoubtedly internal matters arehidden and ruling cannot be based on the latter.”209

125. Financing to a Party Who Explicitly Performs Non-Shariah Compliant Activities

The SAC was referred to on the issue as to whether Islamic financial institutionsmay grant financing facilities to a party who performs non-Shariah compliant activities such as liquor industry, gambling activities, brothel and others.

Resolution

The SAC, in its 58th meeting dated 27 April 2006, has resolved that Islamicfinancial institutions are prohibited from granting financing to companies,bodies or individuals whose activities explicitly involve non-Shariah compliant elements such as gambling, liquor industry and brothel.

207 Ali Ahmad al-Nadwi, Jamharah al-Qawaìd al-Fiqhiyyah fi al-Muàmalat al-Maliyyah, Syarikah al-Rajhi al-Masrafiyyah li al-Istithmar, 2000, v. 1, p. 4334.

208 Al-Subki, Al-Ashbah wa al-Nazha’ir, Dar al-Kutub al-Ìlmiyyah, 1991, v. 2, p. 190. 209 Ibnu Hajar al-Àsqalani, Fath al-Bari Syarh Sahih al-Bukhari, Dar al-Ma`rifah, 1959, v. 4, p. 302.



126. Application of Conventional Overdrafts to Cover Insufficiency inWadiàh Current Account

The SAC was referred to on the issue as to whether a customer may use conventional overdrafts to cover any insufficiency in Wadiàh Current Account.

Resolution

The SAC, in its 8th meeting dated 12 December 1998, has resolved that inprinciple, the use of conventional overdrafts to cover any insufficiency inWadiàh Current Account is contrary to Shariah. However, since conventionaland wadiàh accounts are customer’s rights and liabilities, Islamic financialinstitutions have no right to prohibit their customers from doing so. However,it is the duty of Islamic financial institutions to inform their customers thatsuch practice is contrary to the Shariah.

Basis of the Ruling

The aforesaid SAC’s resolution is based on the account that the practice of usingconventional overdrafts to cover insufficiency in Wadiàh Current Account by a customer is beyond the control of the Islamic financial institutions.

210 Surah al-Ma’idah, verse 2.

“…help one another in furthering virtue and God consciousness, and not in whatis wicked and sinful…”210

Basis of the Ruling

The aforesaid SAC’s resolution is based on the account that such financing wouldresult in the revenue of Islamic financial institutions being generated by non-Shariahcompliant activities. The prohibition is consistent with the saying of Allah SWT asfollows:


127. Commitment Fee on Unutilised Balance of Islamic Overdraft Facility or Revolving Credit

A customer who has received Islamic overdraft and revolving credit facility froman Islamic financial institution will probably only use a portion of the facility at aparticular time and will reserve the unutilised balance for future needs. This situation requires the Islamic financial institution to allocate a portion of moneyfor the facility to the customer, thereby restricting the Islamic financial institutionfrom utilising that allocation to finance other customers or other activities thatwould generate higher profit.

In conventional banking practice, financial institutions will impose a commitmentfee at a certain rate on the unutilised balance of the overdraft and revolving creditfacility. The financial institutions will also observe the utilisation of the credit facilityby their respective customers. If a customer does not utilise the credit facility afterthree months from the date of completion of the facility’s documentation, the financial institution will acquire a written verification/confirmation from the customer that the granted facility is still needed. If the customer fails to verify, thefinancial institution has the right to withdraw the facility. This practice aims to ensure that the customer does not apply for financing in excess of his actual needsand thereby denies the opportunity of other customers to obtain the credit facility.

In this regard, the SAC was referred to on the issue as to whether Islamic financialinstitution may impose commitment fee on the remaining unutilised balance ofthe Islamic overdraft or revolving credit facility.

Resolution

The SAC, in its 12th meeting dated 24 February 2000, has resolved that theproposal to impose commitment fee on the remaining unutilised balancein Islamic overdraft or revolving credit is not allowed.

Basis of the Ruling

Since Islamic overdraft and revolving credit facility are based on bai` `inah or tawarruq contract, imposing commitment fee on the remaining unutilised balanceof Islamic overdraft or revolving credit is contrary to the executed sale contract.Under bai` ̀ inah or tawarruq contract, once the sale contract is executed, the facilityamount allocated to a customer belongs fully to him.

128. Islamic Financial Instrument as Underlying Asset in ConventionalTransaction

Several Islamic money market instruments have been introduced to facilitate marketparticipants to manage their liquidity, where normally, these instruments are issuedthrough direct tender to Islamic financial institutions only. Nevertheless, since theseinstruments are also traded in the secondary market, a number of conventional financial institutions which own these Islamic financial instruments (for examplesukuk) were found to have been using these instruments as underlying asset intheir conventional transactions (for instance repo) to fulfill their liquidity needs.

In this regard, the SAC was referred to on the issue as to whether conventional financial institutions are allowed to use Islamic financial instruments as underlyingasset in their conventional transactions.

Resolution

The SAC, in its 19th meeting dated 20 August 2001, has resolved that sincethe Islamic financial instruments are owned by the conventional financial institutions, it is the institutions’ right and choice to use the Islamic financialinstruments as the underlying asset in any conventional transaction. However, those parties who transact conventionally will be held responsiblefor any transaction which is contrary to Shariah. Shariah compliance of theIslamic financial instruments used in conventional transactions is preservedas long as the executed transaction is not detrimental to the contract andfundamental features of the instruments.


Basis of the Ruling

The conventional financial transactions using Islamic financial instruments as theunderlying asset do not affect the validity of the instruments since the contractand basic structure of the Islamic financial instruments remain unchanged andunaffected. Nevertheless, any Shariah ruling implication arising from the involvement in conventional transactions will have to be borne by the transactingparties.

129. Financial Market Instruments as Underlying Asset in DeferredTransaction

Various assets have been produced as instruments in the financial market, amongothers, mudarabah-based assets (such as Mudarabah Investment Certificate) anddebt-based assets (such as Islamic accepted bills and negotiable Islamic debt certificates). These assets are also used for various purposes including forcharge/mortgage.

In this regard, the SAC was referred to on the issue as to whether the aforesaidfinancial market instruments may be used as underlying asset in deferred transactions.

Resolution

The SAC, in its 19th meeting dated 20 August 2001, has resolved the following:

i. Mudarabah Investment Certificate may be used as the underlying assetin deferred transaction, such as bai` `inah, because it is an asset whichis possessed by its owner and it is not considered as a ribawi item;

ii. Any debt-based asset shall not be transacted on deferred basis becauseevery debt sale (bai` dayn) must be made on cash basis; and

iii. A charged asset may be used as an asset in bai` `inah transaction withthe consent of the chargee.


Basis of the Ruling


i. The sale of Mudarabah Investment Certificates by the certificate holder is identical to the trading of share certificates in which its permissibility has beenverified;

ii. A charged asset belongs to the chargor. As the ownership of the underlyingasset in a bai` `inah transaction will be returned to the original owner, it doesnot affect any interest under the executed charge; and

iii. The scholars unanimously agree that debt shall not be sold on deferred basis.

130. Mechanism in Determining the Amount of Settlement Price in Financial Market

In the sale of Islamic debt securities, the sale price and early redemption price aredetermined at the time the sale contracts are concluded. Nevertheless, there areoccasions in the financial market, particularly for the Islamic private debt securities,where the settlement amount and the initial agreed sale price differ. The price differences are due to the regulation imposed by the Real Time Electronic Transferof Funds and Securities (RENTAS) system whereby the system imposes additionalpayment or compensation in calculation of dividend payment for the leap year.211

Such payment or compensation is also imposed if the dates in which the dividendsare paid and the securities are redeemed fall on an unexpected public holiday. Thispractice is prevalent in the context of private debt securities without secondarynotes. In this regard, the SAC was referred to on the issue as to whether such mechanism is allowed by Shariah.


211 A year that consists of 366 days (once in every four years).

Resolution

The SAC, in its 21st meeting dated 30 January 2002, has resolved that theaforesaid mechanism in determining settlement price as practised in thefinancial system is contrary to the Shariah principles. This is because thetotal settlement price (dividends and principal sum) in Islamic private debtsecurities has to be equal to the total sale price as agreed at the time acontract is concluded. The SAC has also resolved that the late paymentdue to the unexpected public holiday shall not be a factor for impositionof any damages or compensation on the parties involved.

Basis of the Ruling

For Islamic private debt securities that are issued based on a sale contract, theprice of the Islamic securities has already been determined at the time of the conclusion of the contract. Therefore, any differences in the payment amount arenot allowed. In the event of excess payment, the recipient of the payment shallrefund the excess amount to the payor.

In addition, damages or compensation may only be imposed in cases of intentional late payment or due to negligence and carelessness. If the maturitydate of the securities falls on an unexpected public holiday, no damages or compensation may be imposed as such situation does not tantamount to intentional late payment.


131. Restructuring and Rescheduling in Islamic Financing Agreement

One of the features that differentiate Islamic financing documentation from conventional financing documentation is the requirement for a new legal documentto capture every variation of terms and conditions since Islamic finance emphasiseson agreement and mutual consent of contracting parties. This requirement becomesmore apparent when it involves rescheduling and restructuring of a financing, especially for sale-based financing. In restructuring a sale-based financing which involves sale agreement, the original sale must firstly be terminated (fasakh) beforeconcluding the new agreement. The effect of such requirement causes additionalcosts to be borne by the Islamic financing customers in terms of new legal fee andstamp duty for the new legal documents, unlike in the practice of conventional loan,where the contracting parties simply need to conclude a supplementary agreementto reschedule or restructure the loan.

In this regard, the SAC was referred to on the proposal to insert a new paragraphin the Islamic financing facility agreement which verifies it as a rescheduling or restructuring agreement and that it has to be cross referred to the original agreement. However, in the event of restructuring, an issue arises regarding the termination of the cross reference to the original agreement.

Resolution

The SAC, in its 26th meeting dated 26 June 2002, has resolved that the proposal to cross refer a rescheduling and restructuring Islamic financingagreement to the original agreement for the purpose of stamp duty exemption is permissible provided that it is done after termination of theoriginal agreement. In relation to the case of restructuring, the SAC hasrecognised the cross reference method to the original agreement which hasbeen terminated on the ground of maslahah, which is, to avoid double payment of stamp duty.

In the 32nd meeting dated 27 February 2003, the SAC has also resolved thatbased on mutual agreement, the financing period for the customer may beextended without the need for a new contract, provided that both partiessatisfy all concluded promises and the price imposed on the customer doesnot exceed the original sale price.


Basis of the Ruling

Islamic financing can be arranged based on sale contract, ijarah, musyarakah, mudarabah, and others. In this regard, any changes to the duties of the financingreceiver and financier must be referred to the concluded original agreement. Inthe context of a sale contract, normally the price has been fixed during inceptionof the contract. Therefore, any changes to the price require a new agreement inorder to avoid riba and gharar (as the case may be).

132. Bidding Concept by Principal Dealer in Islamic Money Market

A principal dealer in Islamic money market is responsible to bid at certain minimum amount for each sukuk issuance. However, it is observed that the saidprincipal dealer’s responsibility is unlikely based on voluntary bidding concept. Inthis regard, the SAC was referred to on the issue as to whether bidding at certainamount for each sukuk issuance as practised by the principal dealer is in accordance with Shariah principles.

Resolution

The SAC, in its 26th meeting dated 26 June 2002, has resolved that thebidding concept as practised by the principal dealer in Islamic money market is Shariah compliant.

Basis of the Ruling

This concept is a business practice which has been determined by the authorityor the regulator and is viewed as consistent with Shariah principles since there isno elements of riba, gharar and maysir.



133. Financing Settlement Through New Financing

In Islamic financing scheme, there is a possibility where the customer would be facing cash flow problem and hence unable to pay to the Islamic financial institutionduring the financing period. To overcome this problem, there was a proposal toallow the customer to restructure his financing and issue debt securities or sukukto the Islamic financial institution as a method of settling an existing financing facility.

In this regard, the SAC was referred to on the issue as to whether financing settlement through the issuance of debt securities or sukuk to the original financier(which will indirectly create new financial obligation) is allowed by Shariah.

Resolution

The SAC, in its 38th meeting dated 28 August 2003, has resolved that the financing settlement through the issuance of Islamic debt securities to theoriginal financier is permissible. Nevertheless, the rescheduling and restructuring method shall be implemented by taking into consideration theShariah requirements such as, the existence of clear contract, Shariah compliant sale asset, and terms and conditions which are not contrary toShariah.

Basis of the Ruling

Islamic restructuring of debt through a separate issuance of debt securities or sukukto the original financier involves a scenario in which the existing contracting partiesenter into another separate and independent contract.


“It is compulsory to validate a contract as possible as it could be.”212

“The original method of ruling is all contracts are (deemed to be) valid.”213

Generally, there is no Shariah impediment (mani` syar`ie) for the contracting partiesto execute another separate and exclusive contract amongst them. The issuanceof debt securities or sukuk to the original financier is viewed as a transactionwhich does not affect the validity of the existing financing contract. This permissibility is seen as in line with the following fiqh maxims:



134. Undetermined Sale Price in Sale and Purchase Agreement

The SAC was referred on the issue as to whether undetermined and uncertainsale price in sale and purchase agreement is acceptable. For instance, a clause regarding the definition of sale price is stated as follows:

“Islamic financial institution will purchase the asset from the customer at a purchase price which will be determined later based on the terms and conditionsof the agreement.”

Resolution

The SAC, in its 40th meeting dated 23 December 2003, has resolved thatthe undetermined and uncertain sale price in a sale and purchase agreement is not allowed.

“From Abu Hurairah who said that Rasulullah SAW prohibited sale that is based onthrowing of pebbles (hasat) and an uncertain sale (gharar).“214

Among the elements of gharar which annuls a financial transaction is gharar in thedetermination of price, whereby the sale is executed without determining the price,or the price is determined unilaterally or by a third party.215

135. Underlying Concept for Islamic Block Discounting Transaction

As an alternative to credit companies for acquiring additional fund to be used asbusiness revolving capital, an Islamic financial institution would like to implementIslamic block discounting concept based on bai` wadhiàh which is a sale contractwith a lower price than the acquisition cost. Briefly, Islamic block discounting involves the sale of ownership of a contracted right in an Islamic hire purchase(ijarah) agreement by a credit company on discount to the Islamic financial institution (financier). The credit company will be appointed as an agent to collectrent on behalf of the Islamic financial institution. If the credit company failed tosurrender the rental collection to the Islamic financial institution within an agreedperiod, the Islamic financial institution will terminate the facility and take over theduty of direct rental collection.

214 Muslim, Sahih Muslim, Dar al-Mughni, 1998, p. 814, hadith no. 1513.215 AAOIFI, Al-Maàyir al-Syarìyyah, Standard no. 31 (Dabit al-Gharar al-Mufsid li al-Muàmalat al-Maliyyah), 2003,

paragraph 4.

Basis of the Ruling

The undetermined and uncertain sale price would lead to the element of gharar ina sale contract which is forbidden in Shariah because it would cause injustice anddispute. The sale price must be determined either by way of amount or by certainspecific and definite methods agreed at the time of an agreement is concluded.

Rasulullah SAW prohibits conclusion of contract or imposition of condition whichcontains element of gharar as mentioned in the following hadith:


In this regard, the SAC was referred to on the issue as to whether the applicationof bai` wadhiàh concept as the underlying contract in Islamic block discountingtransaction as proposed is allowed by Shariah.

Resolution

The SAC, in its 66th meeting dated 22 February 2007, has resolved that theapplication of bai` wadhiàh concept for Islamic block discounting transaction is inappropriate. The SAC further resolved that bai` al-usul bial-khasm (sale contract at discount) is more suitable underlying concept tobe used as a takyif fiqhi in Islamic block discounting transaction.

Basis of the Ruling

It appears that the application of bai` wadhiàh does not correspond to the features of Islamic block discounting transaction. This is because bai` wadhiàh isa sale with a discount of the cost price, whereas Islamic block discounting is asale with a discount of the cost price plus profit (principal + profit).

In this regard, bai` al-usul bi al-khasm is viewed as the more appropriate underlying concept to be used as takyif fiqhi in Islamic block discounting transaction. Although there is no juristic discussion and classical fiqh literature onbai` al-usul bi al-khasm, it is an acceptable concept in the context of current practice. The term usul refers to the underlying asset in the hire purchase agreement that also covers the economic value generated from the asset.



GLOSSARY

GLOSSARY 215SHAR I AH R E SO LU T I ON S I N I S L AM IC F I NANCE

TERMS EXPLANATION

Akad istithaq Contract of guarantee

Akad isytirak Contract of partnership such as mudarabah and musyarakah

Akhz al-ajr àla al-jah

Charging fee for someone’s reputation

Akhz al-ju`l àlaruqyah min al-Quran

Charging fee for treatment/ medication using verses of al-Quran

Al-àdahmuhakkamah

Common practice as basis of the ruling

Al-ajl Deferment

Al-bai` Sale contract

Al-bai` wa al-salaf Sale contract with credit term

Al-ijarah thumma al-bai`

Lease contract followed by ownershipof asset through a sale contract

Al-jamù baina àqdal-qardh wa àqd al-muàwadhah

Combination of a loan contract andan exchange contract

Al-muqasah al-ittifaqiyyah

Offsetting by mutual agreement ofcontracting parties

Al-muqasah al-jabariyyah

Offsetting by order of the authority

Al-naqd yalid al-naqd

Money begets money


TERMS EXPLANATION

Al-wa`d bi al-tamlik Promise to own or acquire ownership

Bai` `inah Sale contract followed by repurchase bythe seller at a different price

Bai` dayn Sale of debt

Bai` al-dayn bi al-dayn

Sale of debt with debt

Bai` sarf Sale of currency

Bai` al-usul bi al-khasm

Sale of asset at discount

Bai` al-kali’ bi al-kali’

Refer bai` al-dayn bi al-dayn

Bai` bithaman ajil Sale contract based on deferred payment at certain price

Bai` mu’ajjal Refer bai` bithaman ajil

Bai` muzayadah Sale contract based on bidding or auction

Bai` salam Sale contract based on order of certainasset with certain specifications. Fullpayment is made in cash at the time ofconclusion of the contract whereas thedelivery of the asset is deferred to aspecified time


TERMS EXPLANATION

Bai` wadhiàh Sale contract with a price lower thanacquisition cost

Baiàtain fi al-baiàh Two sales contracts within one salecontract

Dayn ghair thabit Debt which is not yet established

Dayn mustaqir Debt which the liability to pay is established

Dayn thabit Debt which is fixed

Dhaman Guarantee

Dharar Harm

Dhawabit Guidelines

Dho` wa taàjjal Reducing the amount of debt whenthe debtor make early settlement

Facultative Retakaful agreement executed between a takaful company and another takaful company (includingconventional insurance company),and the takaful company which underwrites the risks is having theoption to distribute or cede whereasthe latter or conventional insurancecompany has the option to receive orrefuse the risks

Faraid The knowledge or rules on estate distribution according to Islamic principles


TERMS EXPLANATION

Fasakh Termination

Fasid Defective, invalid

Fiqh muamalat A discipline of knowledge that discusses the rules relating to humanaffairs

Fuqaha Fiqh scholars

Gharamah Fine/penalty

Gharar Uncertainty

Gharar yasir Minimal uncertainty

Ghasb Confiscation or unlawful seizure ofproperty

Hajah Need

Hamish jiddiyyah Security deposit

Hibah ruqba A gift during the lifetime of the giver orrecipient of hibah with a condition thatthe death of a party (either the giver orrecipient of hibah) is the effective condition for ownership of the propertyby the surviving party

Hibah umra A gift during the lifetime of the recipient or giver of hibah on the condition that the property will be returned to the giver in case of deathof the recipient


TERMS EXPLANATION

Ibra’ Rebate/waiver of partial or total claimagainst certain right or debt

Ibra’ muàllaq Ibra’ which is subject to certain condition and if the condition is satisfied, the ibra’ will be given

Ibra’ muqayyad Ibra’ which is limited by certain condition

Ijarah Lease or service contract that involvesbenefit/usufruct of certain asset orwork for an agreed payment or commission within an agreed period

Ijarah muntahia bial-tamlik

Lease contract which ends with acquisition of ownership of the assetby the lessee

Ijtihad Rigorous thinking and efforts byscholars who have attained the degree of mujtahid in order to issuecertain Shariah ruling definitely in amatter which is not clearly providedin al-Quran or Sunnah

Ìllah Effective cause

Isqat al-haq Waive of right

Istiqrar taàmul Smooth running of market

Istisna` Sale contract by way of order for certain product with certain specifications and certain mode ofdelivery and payment (either in cashor deferred)


TERMS EXPLANATION

Istisna` muwazi Parallel istisna’

Ittifaqiyyah Mutual agreement

Ìwad Consideration

Jumhur Majority

Kafalah Guarantee

Kafalah bi al-Ujr Guarantee with fee

Kafil Guarantor

Makful ànhu Guaranteed party

Makful lahu Recipient of guarantee or beneficiary

Mani` Syarìe Shariah impediment

Marhun Charged property

Maslahah Public interest

Masnu` Manufactured item

Maysir Gambling

Muàyyan bi al-zat Clearly identifiable and determinable interms of location, quantity and quality

Mubara’ah Mutual waiving of right

Mudarabah Profit sharing contract


TERMS EXPLANATION

Mudarib Entrepreneur of a mudarabah jointventure

Mulzimah Binding

Muqaradah Refer mudarabah

Muqasah Offsetting

Muqtada al-`aqd Objective of the contract

Murabahah Sale contract with a disclosure of theasset cost price and profit margin tothe buyer

Murtahin A party who asks for collateral

Musahamah Mutual contribution

Musawamah Sale contract without the disclosureof the asset cost price and profit margin to the buyer

Musya` A feature of a jointly owned assetthat cannot be separated or divided

Musyarakah Profit and loss sharing

Musyarakah mutanaqisah

A contract of partnership that allowsone (or more) partner(s) to give aright to gradually own his share ofthe asset to the remaining partnersbased on agreed terms

Musyarik Partner


TERMS EXPLANATION

Muta`arafan Becoming common practice

Muwa`adah mulzimah

Binding promise of both parties

Nafaqah Cost of liability

Qabd Possession over a particular asset

Qard Loan contract

Qard hasan Benevolent loan

Qawl al-jadid New opinion

Qawl al-qadim Earlier opinion

Qimah ismiyyah Nominal price

Qimah suqiyyah Market price

Qiradh Refer mudarabah

Qiyas Analogy

Rabbul mal Capital owner/investor

Rahin Chargor

Rahn Pledge/charge

Rahn al-musya` Charge on a jointly owned asset

Rahn rasmi Surrender of charge via formal recordin the registry of the authority


TERMS EXPLANATION

Sadd zarai` Shariah approach in blocking themeans that may lead to a person’s involvement in forbidden matters

Sighah The pronunciation of offer and acceptance

Siyasah Syar`iyyah Basis and approach taken by the rulerfor the interest of the nation and thepeople which is in line with Shariahprinciples

Sukuk Islamic securities/bonds

Sukuk commoditymurabahah

Islamic securities based on tawarruqcontract

Sukuk ijarah Islamic securities based on ijarah contract

Syahadah al-dayn Debt certificate

Syubhah Doubt

Ta`awun Helping each other

Ta`widh Compensation

Tabarru` Voluntary donation/contribution

Takaful A scheme which is based on the spiritof cooperation and helping eachother by providing financial assistanceto participants when needed and allparticipants mutually agree to givecontribution for the said purpose


TERMS EXPLANATION

Outward retakaful Distribution of underwritten risks by atakaful company to another takafulcompany or a conventional insurancecompany

Inward retakaful Acceptance of risks by a takaful company from another takaful company

Taklufah Actual cost

Takyif Adaptation

Takyif fiqhi Fiqh adaptation

Tanazul Waive of the entitlement to claim

Taqyid Limiting

Tasarruf Dealing

Tawarruq/ commodity murabahah

Purchasing an asset with deferredprice, either on the basis of musawamah or murabahah, then selling it to a third party to obtain cash

Tawatu’ Pre-arrangement


TERMS EXPLANATION

Treaty Retakaful agreement between a takaful company and another takafulcompany (including conventional insurance company) which requiresthe takaful company to distribute orcede its underwritten risks and thetakaful company or conventional insurance company which had concluded the agreement shall undertake the risks

Ujr àla wakalah Agency fee

Ujrah Commission

Ùqud muàwadhat Contracts of exchange

Ùqud musamma Contracts which are known amongstthe scholars, mentioned in classicalfiqh literature and precisely explainedin the sources of rulings (such as al-Quran and Sunnah)

Ùqud mustajiddah Contemporary contracts

Ùrbun Down payment/deposit

Ùrf Common practice which is acceptableby the community and does not contradict the Shariah rulings

Ùrf tijari Common business practice which isacceptable by the community anddoes not contradict the Shariah rulings

Wa`d Promise

Wa`d bi al-syira’ Promise to buy


TERMS EXPLANATION

Wa`d mulzim Binding promise

Wadiàh Safe keeping contract in which a partyentrusted his property to another partyfor safe keeping and to be returnedupon request

Wadiàh yadamanah

Safe keeping contract based on trust

Wadiàh yaddhamanah

Safe keeping contract with guarantee

Wakaf A form of endowment by an owner ofa property for public benefit and wellbeing which is allowed by Shariah

Wakalah Agency contract

Wakalah bi al-istithmar

Agency contract for investment

Wasi A person appointed to execute a will

Zariàh ila riba Means leading to riba

Zan al-ghalib Presumption that is closer to certainty

Zimmah Liability


For further information about this publication, please contact:

DirectorIslamic Banking and Takaful DepartmentBank Negara MalaysiaJalan Dato’ Onn50480 Kuala Lumpur, Malaysia

Telephone : +(603) 2698 8044Facsimile : +(603) 2693 3826

In reproducing or quoting the contents, notifications of sources are required.Price: RM35.00 per copy

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